Chapter 9, Problem 1P

Why would means-tested transfer payments (such as food stamps, in which benefits are reduced as income rises) act like an income tax facing recipients?

To determine

The reason behind means-transfer payment acting as an income tax facing recipients.

Explanation of Solution

For example, a thirty percent benefit reduction rate costs to a thirty percent income tax, except it is paid via receiving lower benefits. So when the benefits are reduced as income rises, it also reduces how much recipients keep of additional earnings like taxes.

Economics Concept Introduction

Concept Introduction:

In the case of income tax, as the income increases, the tax liability will also increase. And as the reason the means-transfer payment like food stamps act as an income tax facing recipients.