Consider an economy in which average income is $50,000 but with much income inequality. To provide a social safety net, two possible policies are proposed.

A. A universal transfer of $10,000 to every person, financed by a 20-percent flat tax on income.

B. A The full amount goes to someone without any income. The transfer is then phased out: You lose 20 cents of it for every dollar of income you earn. These transfers are financed by a tax of 20 percent on income above $50,000. means-tested transfer of $10,000.The full amount goes to someone without any income.The transfer is then phased out: You lose 20 cents of it for every dollar of income you earn.These transfers are financed by a tax of 20 percent on income above $50,000.

Which would you prefer?

I have seen smart people argue as follows: Policy A is crazy. Why should Bill Gates get a government transfer? He doesn’t need it, and we would need to raise taxes more to pay for it. Policy B is more progressive. It targets the transfer to those who really need it, and the transfer is financed by a levied only on those with above-average incomes. smaller tax increase