What happens to net taxes when transfer payments increase Wh
What happens to net taxes when transfer payments increase? When both taxes and transfer payments increase?
Solution
Net taxes = Tax - Transfer Payments
When Transfer payments increase, Net taxes decreases ceteris paribus.
When both taxes and transfer payments increase, three scenarios are possible, explained as follows.
(i) Increase in Taxes = Increase in Transfer payments, therefore Increase/Decrease in Net taxes = 0. Net taxes will remain unchanged.
(ii) Increase in Taxes > Increase in Transfer payments, therefore Increase in Net taxes > 0. Net taxes will increase.
(iii) Increase in Taxes < Increase in Transfer payments, therefore Increase in Net taxes < 0. Net taxes will decrease.
