Tax Policy to Promote Labor Supply: The Earned Income Tax Credit.



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Tax Policy to Promote Labor Supply: The Earned Income Tax Credit.



(EITC) A federal income tax policy that subsidizes the wages of low income earners. Like most income tax policies, the EITC has both income and substitution effects on labor supply decisions.

Overall, the United States’ experience with the EITC seems fairly successful. It is a powerful redistributive device that now delivers more cash to lowincome families than any other welfare program in the United States. And it has done so without reducing overall labor supply, the problem with standard cash welfare; rather, this redistribution has been associated with increased labor supply among single mothers (increased labor force participation with no offsetting reduction in hours worked), no effect on fathers, and a modest reduction in labor supply among married mothers

1-b

2-a

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6-c

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10-a

 

3.1 If the tax is on the sale of rutabagas, the buyer bears the statutory incidence, since the “sticker price” of rutabagas does not include the tax. Economic incidence is determined by relative elasticities. In this case, the quantity supplied is more responsive to a change in price, so the less elastic consumers will bear most of the economic incidence. To calculate the relative burdens, solve the equilibrium condition with and without the tax. Without the tax: 2,000 – 100P = – 100 + 200P. Price = $7.00. With the tax, the price the supplier receives is reduced by $2.00. The equilibrium condition is 2,000 – 100P = 200(P– 2) – 100 2,000 – 100P = 200P– 500 2,500 = 300P, Price = $8.33. The consumers’ tax burden = (posttax price – pretax price) + tax payments by consumers, here $8.33 – $7.00 + 0 ≈ $1.33. The producers’ tax burden = (pretax price – posttax price) + tax payments by producers, here $7.00 – $8.33 + $2.00 ≈ $.67. In this case the consumer bears a larger share of the tax burden than the producer.
3.2 a)

b) Suppose that you are a member of Congress and you believe in the utilitarian social welfare function. How would you determine whether to vote for or against the policy?

Where: W is the society’s welfare (collective utility) Ui is the utility of individual i N is the total number of people in society

 

c)The selection and implementation of a proper wage policy require the government to make tradeoffs between efficiency and equity, because too much emphasis on equity in the wage distribution will undermine the economic growth for not releasing productivity thoroughly.

 

d)Earned Income Tax Credit (EITC), an income tax policy aimed specifically at low-income

wage earners. The EITC subsidizes the wages of low-income earners to accomplish two goals: redistribution of resources to lower-income groups and increases in the amount of labor supplied by these groups.

VARIANT 10

Social Insurance in Russia and USA.

1. Social insurance in Russia and USA

Unemployment insurance, workers’ compensation, and disability insurance are three of the largest social insurance programs in the United States, and they share many common features.

Unemployment insurance A federally mandated, state-run program in which payroll taxes are used to pay benefits to workers laid off by companies

Disability insurance: A federal program in which a portion of the Social Security payroll tax is used to pay benefits to workers who have suffered a medical impairment that leaves them permanently unable to work.

Workers’ compensation: State-mandated insurance, which firms generally buy from private insurers, that pays for medical costs and lost wages associated with an on-the-job injury.

Health Care

The USA:

There are 3 types of health insurance in the US:private insurance (66% of US population; employment-based, direct purchase) Employers offer insurance to qualified employees in the firm, typically; employers also typically charge employees some share of the employers’ premium payments for insurance. 1st reason- employers provide most private insurance is the nature of insurance risk pools- is the group of individuals who enroll in an insurance plan. The goal of all insurers is to create large insurance pools with a predictable distribution of medical risk. 2d- the tax subsidy to employer -provided health insurance. Public insurance (Medicaid-a federal and state program that provides health care for the poor; Medicare-a federal program that provides health insurance to all people over age 65 and disabled persons under age 65; is financed by a payroll tax of 1.45% each on employees and employers, TRICARE/CHAMPVA-health insurance for those currently or formerly in the military and their dependents), uninsured individuals-1-even risk-averse individuals may be unwilling to purchase insurance if it is not available at an actuarially fair price. 2-adverse selection in the health insurance market. The third one uncompensated care The costs of delivering health care for which providers are not reimbursed.

Russia:

• The Constitution of the Russian Federation provides all citizens the right to free healthcare under Mandatory Medical Insurance.

• In Russia we have national health insurancea system whereby the government provides insurance to all its citizens, as in Canada, without the involvement of a private insurance industry

• Ministry of Health Care is the head of national (public) health care system in Russia

• There’s also private branch of health care. Since 1996 government health facilities have been allowed to offer private services, and since 2011 some private providers have been providing services to the state-insured. The private sector in Moscow has expanded rapidly

• There are a few branches of national (governmental) system of health care: Primary Health Care, Specialized care, Obstetric and gynecological care, Medical care for children, High-tech medical care, Recreational Treatment.

 

2. Income distribution and Welfare program. Absolute deprivation and poverty rates.

Redistribution may be concerned with either relative income inequality or absolute deprivation, where the latter is measured by the poverty line. Income inequality is high in the United States both relative to other nations and to historical standards.
There are two major cash welfare programs in the United States ( Temporary Assistance for Needy Families TANF and Supplemental Security Income SSI) and four major in- kind welfare programs (food stamps and other nutritional programs, Medicaid, and public housing).

 

3. Moral hazard effects of a means- tested transfer system.
By providing income transfers to low-income groups, the program makes being low- income more attractive, encouraging individuals to work less hard.This moral hazard effect reduces the labor supply of low-income groups, and the resulting inward shift in their labor supply curve lowers social surplus. In other words, the moral hazard response to this program adds a leak to the redistributive bucket.

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VARIANT 11



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