grams include Social Security, unemploy- ment insurance, government employees' Susan Bentley pensions, and veterans' pensions and compensation. These programs are not targeted specifically at the low-income population, but at the general population Income Transfers, Taxes, or particular groups of workers. Benefit and the Poor levels are based partly on work history. The second set of programs, called cash public assistance, includes Aid to Fami- lies with Dependent Children (AFDC), While government income transfer pro- dependents against lost earnings by the Supplemental Security Income, and grams reduced or eliminated poverty for retirement, death, or disability of a bread- general assistance. These programs are some benefit recipients, 10 percent of the winner or by temporary unemployment. targeted to the low-income population U.S. population remained in poverty after Others are designed to protect people and do not require work experience to be all transfers were made in 1983. In non- against unpredictable expenditures like eligible for benefits. To obtain benefits, metro America, the 1983 poverty rate medical care or to provide essentials like one must have income and assets below was 12.8 percent. Moreover, many of adequate housing and food. specified levels. And the benefits are these poor were working poor, and taxes usually reduced or withdrawn when the reduced their earnings. The nonmetro person gets a job or earns more money. Three types of programs make up today's working poor will benefit from recent tax U.S. income transfer system: cash social reform that lessens their teix burden. insurance, cash public assistance, and in- The final group, in-kind transfers, is tied kind programs. Cash social insurance pro- to a specific need for a good or service. Most people are aware that the poor often receive public assistance (wel- fare) from the government. But other Fed- eral, State, and local government income transfer programs (like Social Security and unemployment insurance) also affect the well-being of the poor and may actually have a bigger impact on poverty than wel- fare.

But while government income transfers can help many poor people increase their incomes, taxes on a poor person's earn- ings can amount to a significant portion of income. The tax bite has tended to be bigger for the nonmetro poor, who are more likely to rely on earnings and con- sequently to pay taxes than the metro poor. The tax reform law passed last year will reduce the tax burden on the work- ing poor. In this article, 1 examine the effects of income transfers and taxes on the measurement of poverty in America and the overall effects of these transfers and taxes on the income of the poor liv- ing in nonmetro areas.

Income Transfer Programs Help Provide a Minimal Standard of Living

Most income transfer programs are intended to protect workers and their

Susan Bentley is a sociologist in the Agricul- Food stamps are one of the most significant transfer payments for the poor. Though ture and Rural Economics Division, ERS. such benefits are not taxed, inflation has caused the working poor to pay higher taxes.

^nß- February Í987/Rural Development Perspectives These benefits are in-kind in tiiat the number of recipients increased and as When cash public assistance payments, actual good or service is directly provided medical costs soared. By 1984, the like Aid to Families with Dependent Chil- or obtained with a voucher for that good Medicaid program provided over $34 bil- dren and general assistance, are also or service. They include health care lion in medical assistance. Likewise, the added to income, the poverty rate drops benefits through Medicare and Medicaid, real value of Medicare benefits expanded to just over 15 percent. food benefits from the Food Stamp and from $19 billion in 1970 to $65 billion National School Lunch programs, and in 1984. The government computes the official housing benefits from public or subsidized poverty rate by estimating the number of rental housing programs. Except for Medi- persons whose money income (including care and a portion of the school lunch Transfers Significantly Reduce wages and salaries, self-employment benefits, the in-kind transfer programs are Poverty income, cash government transfers, also targeted to the low-income popula- property income, and private transfers) is tion. To determine the effects of transfers on below a certain threshold, which depends poverty, we need to determine the inci- on family size and composition. In 1983, the official poverty thresholds ranged Poor persons can receive benefits from all dence of poverty before including govern- ment transfers as income. Pretransfer from $4,775 for a single person over 65 three types of transfer programs, so that years of age to $20,310 for a family of a program can help alleviate poverty even income considers only income from earn- ings, property income (dividends, interest, nine or more. The threshold for a family if it is directed toward the general popu- of four was $10,178. lation rather than just the poor. The best and rent), and private transfers, like pen- example of a program directed toward the sions and alimony. In 1983, the official U.S. poverty rate was general population which helps alleviate 15.2 percent. When poverty rates for or prevent poverty is Social Security; it is The pretransfer incidence of poverty nonmetro and metro residents are com- also the Nation's single largest transfer increased from 18 percent in 1969 to 24 puted separately, however, the 1983 program. percent in 1983 (fig. 1), but when cash nonmetro poverty rate was 18.3 percent, social insurance payments like Social compared to a metro poverty rate of 13.8 In-Kind Transfers Are Fastest Security, government retirement, and percent. unemployment insurance are added to Growing income the incidence of poverty in 1983 The official poverty definition excludes in- diminished to about 16 percent. kind benefits, and consequently calcula- The real value of total income transfers increased substantially from 1969-84. Figure 1 For example, the market value (the pur- U.S. poverty rates 1969-1983 chase price of the good or service) of cash social insurance transfers was about $ 125 Percent of billion (in 1984 constant dollars) in 1969, total population compared with a market value of $271 25 r- billion in 1984. Social Security benefits provided much of this increase. The mar- ket value of Social Security benefits was $74 billion in 1969, compared with $173 billion in 1984. 20 -

Cash public assistance transfers, while growing from a market value of $ 18 bil- lion (in 1984 constant dollars) in 1969 to $27 billion in 1984, have declined in value since their peak in the late seven- ties. Aid to the poor has become concen- 10 - Poverty rate after cash public assistance trated in such in-kind programs as food and health care, which are directed to specific needs of the poor. Poverty rate after in-kind transfer

In-kind transfers are the fastest growing component of the income transfer sys- tem. The national Food Stamp program, for example, provided a market value of J I L J 1 I l__L J I L $7 billion of food in 1974, its first year, 1967 69 71 73 75 77 79 81 83 compared with almost $ 11 billion in Source: Sheldon Danziger, Robert Haveman, and Robert Plotnick, "Antipoverty Policy: Effects on the Poor and Nonpoor," paper presented at "Poverty and Policy: Retrospect and Prospects" conference of 1984. The in-kind Medicaid program, the Institute for Research on Poverty, Williamsburg, VA, 1984. begun in 1965, expanded rapidly as the

February 79S7/Rural Development Perspectives 31 lions using this definition understate 1978. In particular, the effectiveness of tax income below it. Based on before-tax income and thus overstate the estimates cash public assistance transfers was income, the official poverty statistics fail of poverty. Although government outlays reduced by the Omnibus Budget Recon- to account for such families. for in-kind benefits grew rapidly in the ciliation Act of 1981, which modified the 1970's, the official poverty rate did not AFDC program by targeting benefits to The two major Federal taxes affecting change much. If in-kind benefits were the "truly needy," or those unable to individuals are the income tax and the valued at the purchase price of the good work. Because AFDC income eligibility payroll tax (largely Social Security). Fed- or service and included as income, the limits were lowered and certain allowable eral tax policy is particulariy important in national poverty rate would have dropped deductions from income, such as child nonmetro areas, where most poor fami- to about 10 percent in 1983. care and work expenses, were eliminated, lies contain a worker whose earnings are many working poor were removed from subject to the payroll tax. In 1983, over Even after we account for all income the program in 1983. 68 percent of nonmetro poor households transfers, the poverty rate remains higher had at least one worker, and 29 percent in nonmetro areas than in metro areas. In Taxes Another Problem for had two or more. In contrast, only 54 per- 1983, after including in-kind transfers as Working Poor cent of metro poor households had at income, the nonmetro poverty rate was least one worker, and only 15 percent had 12.8 percent, compared with the 9.1- two or more. percent metro rate. Differences in pro- The official poverty definition is based on gram participation rates partially explain after-tax income, but poverty estimates During the early 1970's, Federal income the higher nonmetro poverty rate, since over the years have been computed from the nonmetro poor are less likely to par- before-tax income data. Because the low- tax liability for poor families was kept to a minimum by various laws that increased ticipate in in-kind programs, particularly income population originally paid only a the income level at which a family began housing and Medicaid programs. small proportion of its income in taxes, the difference between before- and after-tax to pay income tax. The earned income tax credit, enacted in 1975, provided relief income transfers have been less effective income was not significant. But inflation from payroll tax for low-income taxpayers at reducing poverty recently. They have and changes in the tax system have made with children and improved work incen- removed a smaller proportion of the the tax bite on the poor bigger, so that a tives by enabling them to keep more of pretransfer poor from poverty, and post- family may have a before-tax income the money they earned. transfer poverty rates have risen since above the poverty threshold, but an after-

High inflation rates during the late 1970's raised the poverty thresholds (updated annually in step with the Consumer Price Transfer Payments Are 1984. Medicare is next, accounting Index), but tax adjustments offsetting the for 14.7 percent of transfer payment Important to Regional effects of infiation did not keep pace. Economies income. The remaining payments were from military retirement (7.1 percent). State and local government in 1978, for example, a family of four with Income transfers are a major source retirement (4.3 percent), Federal earnings at the poverty line paid $269 in of personal income not only to retirement (4.2 percent), unemploy- Federal income tax and Social Security recipients, but to the regions where ment compensation (4.1 percent), tax. By 1984, that same family paid they live. Income received as trans- Food Stamps (3.1 percent). Sup- $1,075 in Federal income and payroll fer payments in 1984 equaled $416 plemental Security Insurance (2.8 taxes, an increase of $800. Expressed as billion, or 13.8 percent of all personal percent), Aid to Families with Depen- a percentage of income. Federal income income nationwide, according to the dent Children (2.4 percent), railroad and fwyroll taxes consumed 10.1 percent U.S. Department of Commerce's retirement (1.8 percent), general of the earnings of a four-person family at Bureau of Economic Analysis (which assistance (0.2 percent), and miscel- the poverty level in 1984, compared with defines transfer payments to include laneous other programs (9.9 per- 4 percent in 1978. Add on State, some in-kind programs like Food cent). property, and sales taxes, and taxes can Stamps and Medicare, but excludes consume an important part of a poor others like Medicaid, school lunches, Metro counties had somewhat higher family's income. and public housing.) In nonmetro per capita benefits ($1,774) than America, personal income received nonmetro counties ($1,734), but as transfer payments totaled $96.8 In 1983, nonmetro poor households were transfer payments in metro counties billion, or 17.2 percent of all personal more likely to pay Social Security taxes accounted for a smaller portion of and Federal income taxes than were income. total personal income, about 13.8 metro poor households (fig. 2). These percent. Transfer payments are espe- figures reflect the higher proportion of Social Security is the largest transfer cially important in the nonmetro nonmetro households relying on earned payment program, accounting for Northeast and the nonmetro South, and taxable income. 45.4 percent of all transfer payment where they accounted for almost 20 income in nonmetro America in percent of personal income in 1983. The nonmetro poor were also more likely to pay State income taxes than were the

32 Februani 798 7/Rural Development Perspectives Figure 2 lies with Dependent Children, are lower U.S. households in poverty, percent paying taxes, 1983 in nonmetro than metro areas. A national minimum AFDC benefit level, for exam- ; Percent ple, is likely to be higher than the benefit received by many rural residents, and this ; 50 r- would increase the effectiveness of that program in nonmetro areas.

Metro 40 - Work incentives and the targeting of pub- r_j Nonmetro lic assistance to the truly needy, or those unable to work, are also important issues in nonmetro areas. Many nonmetro poor households already contain at least one worker and are not able to escape poverty through working. These families may need further assistance. Recent Federal I tax reform will alleviate part of the 20 problem by raising the income levels at which families begin to pay taxes on their earnings and improving the after-tax i incomes of the many working poor and 10 near-poor. Similar reforms in State income tax laws would also help many working poor.

Income transfers are only part of the Federal income State income Social Security Property income story for many poor. For exam- ple, in the last several years, as Federal Source: U.S. Bureau of the Census. income transfer policy has sought to increase work incentives for the able- bodied poor. Federal income taxes have metro poor, and, since the nonmetro poor Poverty has proved difficult to eliminate, had the opposite effect. As changes in are more likely to own their own homes, although we spend billions of dollars income transfer policy are proposed and they were more likely to pay property annually on income transfers. Recent debated, an examination of all facets of taxes. public debate on the government role in government policies is necessary to reducing poverty has centered on three ensure that they work in concert in the AAany people whose before-tax income is components of income security policy: fight against poverty. just over the poverty line pay enough minimum income guarantees, work income and payroll taxes to place their incentives, and program costs. A mini- after-tax, or spendable, incomes below mum income guarantee would provide a For Additional Reading... the poverty threshold. If the 3 million tax- basic income floor for the poor. However, payers whose after-tax incomes were a basic minimum income program would Virginia Getz, "In-Kind Benefits Help below the poverty threshold in 1983 were also need to incorporate work incentives Reduce Poverty," Rural Deuetopment Per- counted as poor, the national poverty rate for those able to work. A program which specliues, October 1985, pp. 38-40. would have been 16.5 percent. would provide both basic needs and preserve work incentives may be very costly, as well as difficult to formulate. In Institute for Research on Poverty. the meantime, however, recent Federal "Poverty in the united States: Where Do tax reform will enable the working poor Constructing poverty rates using different We Stand Now?" Focus, Volume 7, measures of income, such as pretransfer to retain more of their earnings. Winter 1984, pp. 1-13. income or income after taxes, helps us to evaluate the impact of transfers and taxes Any major changes in income security on poverty. Cash social insurance trans- policy are likely to have somewhat differ- Sar A. Levitan, Programs in Aid of the fers are the most effective types of trans- ent effects in metro and nonmetro Poor. 5th ed. Baltimore and London: fers in alleviating poverty, followed by in- areas. Johns Hopkins university Press, 1985. kind transfers and cash public assistance. In recent years however, the post-transfer Minimum income guarantees would be (J.S. Department of Commerce, Bureau poverty rate has grown more rapidly than particularly important in nonmetro areas, of the Census. Estimates of Poverty the pretransfer poverty rate, indicating for many nonmetro poor who receive Including the Value oftioncash Benefits: that these income transfers have become transfers are still in poverty. Cash public 1983. Technical Paper Mo. 52, August less effective in reducing poverty. assistance benefits, primarily Aid to Fami- 1984.

February / 98 7/Rural Development Perspectives 33