Essay: Expanding income transfers in the U.S.
The implicit assumption in point one is that, given the current level of spending on transfers, neither the large costs nor the worse disincentives that would accompany additional transfer spending is acceptable. The conclusion that follows is that wealthy economies are close to or may have already reached the economic limits of transfer spending.
It is critical to recognize that point one applies only to income-tested transfers. The American set of income tested programs often imposes marginal tax rates of 50 percent or more on working age families near the official poverty line (Holt and Romich 2007). In contrast, universal transfers, such as child allowances that pay a fixed amount per child independent of family income, do not phase out as family income increases. Thus, they do not create high marginal tax rates for poor and near-poor families and the resulting adverse work and family structure incentives. Point one, then, is not a compelling argument against expanding income transfers in the U.S. if universal programs are an option.
Naturally, the benefits of eliminating the phase out range and its disincentives with universal programs do not come cost-free. Since all families that meet a simple condition (e.g. children under 18, over age 65) qualify, the financial cost of a universal transfer program is much higher than that of an income-tested program providing the same average benefit. The higher costs are paid via higher taxes on middle and upper income families. Those taxes create adverse incentives, but not for poor and near-poor persons. This implies that universal transfer programs would probably have fewer negative effects on low income persons’ work effort and family structure than income tested programs.
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