Eleanor Finch
Transfer payments are a redistribution of income and wealth by a government body or an individual to another individual or entity, without receiving any goods or services in return. They are one-sided in nature, with one party enjoying economic benefits without providing anything in exchange. These payments are often used to stimulate the economy and are considered a form of income redistribution, with the government pursuing policies to redistribute money to those in need. Examples of transfer payments include welfare, financial aid, social security, and government subsidies for certain businesses.
| Characteristics | Values |
|---|---|
| Definition | A one-way payment to a person or organisation with no goods or services exchanged |
| Other names | Government transfer, fiscal transfer |
| Examples | Welfare, financial aid, social security, student grants, unemployment insurance, government subsidies for certain businesses |
| Who it's for | Individuals, organisations, private companies, government bodies |
| Purpose | Redistribution of income and wealth, humanitarian reasons, stimulating the economy |
| Initiated by | Local, state and federal governments |
| Payment methods | Cash, electronic transfer, paper payments (cash or cheques) |
| Criticism | Do not produce outcomes that are economically advantageous |
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What You'll Learn
Social security
In macroeconomics and finance, a transfer payment is a redistribution of income and wealth by a government to a person or organisation that has given or exchanged no goods or services for it. These payments are one-sided in nature, with one party enjoying economic benefits from the other party. Transfer payments are considered non-exhaustive because they do not directly absorb resources or create output. They are also not included in the calculation of gross domestic product (GDP).
According to Keynesian economics, there is a "multiplier effect" to transfer payments, meaning every dollar in payments stimulates a chain reaction that results in more spending than the original dollar. This effect is particularly beneficial during economic recessions, as it puts more money into the hands of those in need and helps to stimulate the economy.
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Welfare
In-kind transfer payments are another option, where individual goods and services are provided to households by governmental bodies and non-profit institutions. Social security benefits, such as food stamps, are an example of in-kind transfers. These benefits are designed to provide income continuity for those who have retired or are unable to work.
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Student grants
A transfer payment is a one-way payment made without receiving any goods or services in return. It is a redistribution of income and wealth, often from the government to individuals through social programs. Student grants are a form of transfer payment, and they are provided by the government or educational institutions to assist students with the costs associated with their education. These grants may be need-based or merit-based.
Need-based grants are typically awarded to students who demonstrate financial need, with the amount of funding determined by the student's or their family's income. These grants help ensure that students from low-income backgrounds have access to education and can afford the associated costs, such as tuition, fees, and living expenses. Need-based grants may be offered by the government, the educational institution, or external organizations, and they often have specific eligibility criteria and application processes.
Merit-based grants, on the other hand, are awarded based on academic achievement, extracurricular involvement, or other criteria specified by the granting institution. These grants recognize outstanding academic performance or potential and may be offered as tuition discounts, stipends, or other forms of financial assistance. Merit-based grants may also be awarded through scholarships, which can be provided by the institution itself or external organizations and foundations.
It is important to note that the availability and eligibility criteria for student grants may vary depending on the country, state, or institution. Additionally, the process of applying for financial aid as a transfer student can differ from that of a first-year student, and transferring between institutions may impact the continuity of financial aid. Students are advised to research the specific requirements and policies of their desired educational institutions to maximize their access to financial support.
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Unemployment insurance
In the US, unemployment insurance is a common type of transfer payment. This is a federal government payment made to unemployed individuals who are actively seeking full-time work. To receive unemployment insurance, individuals must serve a 7-day unpaid waiting period at the start of their claim, during which their earnings must be less than their benefit rate. They must also be able to work full-time and have written authorisation to do so. Eligibility is determined after a claim is filed, and payments are made via direct deposit or a debit card.
Transfer payments are often introduced or expanded during economic recessions to stimulate the economy and support those in need. They can also include welfare, student grants, and social security payments.
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Cash gifts
In the United States, cash gifts can be subject to tax rates of up to 40%, depending on the size of the gift. The person making the gift is responsible for reporting it to the Internal Revenue Service (IRS) and paying any applicable taxes. However, due to annual and lifetime exclusions, most people do not end up paying gift taxes. For example, in 2025, individuals can give gifts of up to $19,000 to as many people as they want without incurring any tax or reporting obligations.
It is important to note that the rules and reporting requirements for cash gifts vary depending on the jurisdiction. For instance, in the US, cash gifts are treated differently from monetary payments for work or services. While cash gifts may be subject to gift taxes, payments for work or services generally do not require tax reporting unless they constitute a business or self-employment income.
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Frequently asked questions
A transfer payment is a one-way payment to a person or organisation for which no goods or services are exchanged.
Examples of transfer payments include welfare, financial aid, social security, unemployment insurance, and government subsidies for certain businesses.
Government payments to corporations, including bailouts and subsidies, are not typically described as transfer payments.
Governments use transfer payments as a means of income redistribution, providing money to those in need through social welfare programs. Transfer payments can also be used to stimulate the economy during economic recessions.
