6 - Optimal Design Of Transfers

Question 1

what is the difference between intensive and extensive margin responses

Answer 1

intensive = individuals choose how many hours they want to work

extensive = choose whether they want to work or not

Question 2

what does the US do

Answer 2

• rewards low income workers
• negative MTR = negative phase out = rewards work
• small lumpsum grant = doesnt really benefit non-workers

Question 3

what is the optimal transfer at bottom if individuals respond to taxes only through intensive margin

Answer 3

• lumpsum grant = -T(0) > 0
• high MTR = phases out quickly

Question 4

what is the highest phase out rate possible

Answer 4

• a horizontal line = each additional £ of income reduces £ of transfer

Question 5

the shallower the slope means …

Answer 5

the higher the phase out rate
- high T’(z) = high MTR
- lower slope = 1-T’(z)

Question 6

why are high MTR at the bottom efficient

Answer 6

1. they target the needy - people that need it the most
2. we know that for below z* higher MTR can disentivise working - but since earnings are low at the bottom to start with it wont generate a huge loss

Question 7

under what conditions will the gov provide higher transfers for low income workers

Answer 7

• when non-workers are seen as less deserving than average workers
• low lumpsum grant
• negative MTR = the government will provide a subsidy - pay higher transfers for low income workers than 0 hours

Question 8

when do we give high transfers to non-workers

Answer 8

when there is a high lumpsum grant

• high -T(0)

Question 9

if the gov increase the transfer rate what will happen to the slope

Answer 9

• higher transfer = higher phase out rate

Question 10

what are the 3 effects of a government reform on transfers

Answer 10

1. mechanical fiscal cost = dM
2. welfare effect = dW
3. fiscal cost = dB

Question 11

what is the mechanical cost?

Answer 11

the cost to the government assuming that the individuals dont change their behaviour

Question 12

what is the optimal bottom rate tax formula
- how does dm,dw,db play into this

Answer 12

at the optimal when dM + dB + dW = 0

t1 = g0 - 1 / g0 - 1 + eo

Question 13

according to the formula what is the distribution preference when g0 > 1

Answer 13

• big lumpsum grant -T(0)
• if the transfer is high then tax rate must be high to expense this
• high phase out rate
• high t1
• shallow slope

Question 14

what does g0 > 1 mean

Answer 14

• g0 = the social welfare weight of 0 earners

= we care about 0 earners welfares greater than average

Question 15

according to the formula what is the distribution preference when g0 < 1

Answer 15

• society sees nonworkers as freeloads and nondeserving
• EITC
• negative tax rate
• intercept is close to 0 (no lumpsum grant)
• incentivise non-workers to work
• slope greater than 45’

Question 16

under what conditions are in work subsidies optimal

Answer 16

• labour supply responses are concentrated along the extensive margin
• the gov cares about low income workers = g1>1

Question 17

what is the assumption of the extensive responses model

Answer 17

that behavioural responses only take place through the extensive margin

so earnings dont respond to MTRs

Question 18

what is the objective of gov subsidies

Answer 18

to incentivise people to work more than the decrease in tax rate will make them want to reduce their hours

• as long as intensive marginal responses are small - people dont switch from z2 to z1
• we want to switch to be from z0 to z1

Question 19

why is the extensive reform increase dc1 a win win

Answer 19

1. dM + dW is positive
   - social welfare gain is greater than the fiscal cost
   = positive redistribution effect
2. there is a tax revenue gain - induces non-workers to start working

Question 20

what is g1

what is g1 > 1

Answer 20

the social welfare weight on low-income workers with earnings z1

£1 distributed to low paid workers is valued more than £1 distributed to all

Question 21

when is the optimal bottom rate formula satisfied
when g1>1

and what is the equation

Answer 21

dM + dB + dW = 0

t1 = 1-g1 / 1-g1+e1

Question 22

why is it better to have a larger transfer to only z1 than to those with 0 income

Answer 22

• 0 income will distrot z2 incentives
• we dont want higher types to move down
• grants = distort behaviour of all people on extensive margin

Question 23

summary

what is graph if
g1 > 1
low income workers more deserving than average

Answer 23

EITC
* negative t1
* subsidy
* low phase out rate at the bottom is optimal
* only if labour responses are concentrated along the extensive margin - z2 wont change behaviour

Question 24

summary

what is graph if
g0 > 1
non-workers more deserving than average

Answer 24

• high grant
• high MTR
• shallow slope - high phase out rate at bottom
• no strong response along the extensive margin (dont want people to quit work)

Question 25

summary what is graph if g0 < 1 non-workers are less deserving than average = freeloaders

Answer 25

* low grant * low phase out rate at the bottom * low tax rate

Question 26

what is better - means tested transfer programs (out of work) - in work benefits (EITC)

Answer 26

in work benefits - redistribute to low income workers - improve incentives to work means tested - incentivize people it is not aimed at: to not work - high phase out rates

Question 27

what are other kinds of transfers that are better than means tested cash transfers - what are better options than giving low incomers cash

Answer 27

1. tagging 2. in-kind programs

Question 28

what are the 3 criteria needed for tagging to be successful

Answer 28

1. observable characteristics to the gov 2. this characteristic is negatively correlated with earnings capacity = makes sure its redistributed to those that need it from high to low ability 3. immutable = no moral hazard because - no incentive to change characteristics

Question 29

what is tagging

Answer 29

targeting benefits to observable individual characteristics - groups of people that are given special tax schedules * disabled, single mum, gender

Question 30

what are in kind transfers

Answer 30

transfer of goods or services rather than cash facilitated by a government to its poorer citizens

Question 31

what is the rational individual perspective of in-kind transfers

Answer 31

if an in-kind transfer is not tradeable then it is inferior to cash transfers = individuals are worse off because they cant sell if it is tradeable at market price then equivalent - rational perspective = cash transfer is preferred

Question 32

- why do societies do in-kind redistribution (4 and reasons)

Answer 32

1. commodity egalitarianism - some goods should be provided to all - human rights (education, health care) 2. paternalism - society imposes its preferences 3. behavioural - government can make better decisions on behalf of them (self control) 4. efficiency - could be efficient if in-kind can prevent those who dont really need the transfer from getting them

Question 33

what are the social perspective justifications as to why in-kind transfers are made instead of cash (preferred) just list the 4

Answer 33

1. commodity egalitarianism 2. paternalism 3.behavioural 4. efficiency

Question 34

what does the Barr 2022 paper test

Answer 34

what are the long run effects of cash transfers for children in low-income families - does the additional tax deduction for december born first children over january have a LR effect to the childrens earnings when they are in their 30s - december get an extra year of benefits

Question 35

what does the Barr 2022 paper do

Answer 35

* they track the impact of the tax refunds in the first year of newborns life - families get more EITC funds for newborns * does this extra refund = mean that firstborns do better off * uses IRS tax return data and educational data * uses regression discontinuity design at the dec/jan eligibility cutoff to compare first born children in their 30s

Question 36

what does the Barr 2022 paper find

Answer 36

* December born kids get on average 1300 more than jan * transfer in infancy increases young adult earnings - december born adults earn 1-2% more than jan - december born perform better on maths/reading tests and more likely to graduate * large LR effects on earnings means that the transfer pays for itself by creating larger increases in income - and then tax revenue

Question 37

what are the key takeaways from barr 2022

Answer 37

- extra money in early stage life has large long lasting effects - increasing transfers = beneficial - and will pay for itself since the cost is smaller than future benefits - has infinite return