Both transfer programs and taxes affect incentives. Consider a program designed to help the poor that promises each aid recipient a minimum income of $10 000. That is, if the recipient earns less than $10 000, the program supplements his or her income by enough to bring it up to $10 000.
Explain why this program would adversely affect incentives for low-wage recipients. (Hint: Show that this program is equivalent to giving the recipient $10 000, then taxing his or her labour income at a high marginal rate.) Describe a transfer program that contains better incentives. Would that program have any disadvantages? If so, what would they be?