Alright, so now that we've discussed poverty a little bit, let's consider some of the policies that the government can put in place to help reduce poverty. So there are some programs that already exist, but we're also going to talk about some programs that are possible helps to reduce poverty. Okay. The first one we talked about was the minimum wage laws. Minimum wage laws, we talked about these with price floors and price ceilings. Remember that the minimum wage law was going to be a price floor, right? It's going to be a minimum wage they can earn and that you can see is going to help the poor earn more money, right, with a minimum wage so that they at least are making some amount of money.
The next one is welfare. This is another policy that the government puts in place and this is a government program that supplements the income of people in need, so it supplements the income. This is generally cash payments. So if you're poor, right, you can receive some cash from the government through this welfare program and it's not like you can receive it forever, there are usually restrictions in place but you can get cash for being poor basically like that.
The next one is a negative income tax. So generally, when we pay taxes, right, we have to pay taxes, but a negative income tax would be where a poor family might get a subsidy from their tax payment. So when it comes to be tax time, instead of writing a check, they're going to receive a check, okay? So we have something similar in the US called this earned income tax credit and it sort of works like a negative income tax in essence.
Alright, so here I've got a simple example of how a negative income tax might work. So let's check this out real quick. So let's say in this simple economy, the taxes are calculated by this calculation of just a 1 fourth of your income minus $10,000. Okay, so we're just going to keep it simple here. We take your income divided by 4 and then subtract 10,000. So first let's see this poor family that's earning $12,000 a year. Well, we would take a quarter of their income, 1 fourth times the 12,000, right? One fourth of their income minus 10,000. This is how the taxes are calculated in this economy, whatever it is, and we get 3,000. Right? 1 fourth of 12,000 is 3,000 minus 10,000. Well, that is going to give us a negative 7000, right? So this poor family in this economy would receive 7,000 in this negative income tax. Whereas let's say we have a rich family earning 60,000, so they would pay 1 fourth of their 60,000 minus the 10,000. Right? And 1 fourth of 60,000 is 15,000 minus 10,000, well they end up paying 5,000 in taxes. Right? So there's going to be some threshold you reach where you start paying taxes instead of receiving subsidies in the case of a negative income tax. Cool?
Alright, let's talk about one more here. This is the in-kind transfers, alright? In-kind transfers, so we talked about this a little bit already. This is non-cash stuff, right? This is where poor people get things that are not cash per se, right? This could be sort of like during Christmas season where charities provide food, clothing, and toys, right? Or we see the food stamp system where the government provides vouchers. The government provides vouchers for you to buy food at the store, right? This isn't cash they're giving you, they're giving you money that you can only spend on food, right? Or free health care, right? Free health care, this would be a service that you would have to pay for, but the government is providing it to poor people, right? And that's through Medicaid here in the US.
So now let's talk about one of the problems here with introducing these anti-poverty programs and that is that it has issues with the incentive to work. Alright? It causes issues with incentive to work. Alright? Let's think of an example here. So what we see is that there are benefits, right? When you're poor, you're getting some benefits, right? You're getting this Medicaid from the government, the food stamps, so you're getting these other sources of income for being poor. So you can imagine as you start making more money, you're going to lose those benefits. So it could end up being more costly for a poor family to work rather than lose these benefits that they were getting before. So let's think of a simple example here. Suppose that there's a program that guarantees that every family is going to get $20,000 no matter what. If you work, if you don't work, you're going to get 20,000. Now let's pretend that you're someone that's earning 15,000 a year or 12,000 a year, right, and you're working really hard to earn this money, but at the end of the game, the government is going to supplement your income and bring you up to 20,000 regardless of what you are making. So in your best interest, you could just take your time off and earn the 20,000 dollars right? And that's not good for the economy, right? That's inefficient. We're going to lose all that work effort that you're putting into the economy, that's going to be lost because you're going to see that you're better off just getting the government payment, right? So that could be a problem there with these welfare programs. And we saw this recently, there was an issue with Obamacare where poor families were getting big subsidies from the government to pay for their health care, but as they earned more money, those benefits decreased and they were no longer receiving money from the government to pay for their health care and this extra money that they're earning, right, they got better wages at work, well they're going to have to take that money and spend it on health care, so they're almost no better off. They're working harder, they're getting more money, but their standard of living has no increase even though their income increased. Okay, so that was kind of a problem that we saw when Obamacare was introduced. We saw that poor families moreover struggled with the rising health care costs as they earn more money. Alright, cool. Let's go ahead and move on to the next video.
