Question 11.9

1. A high sales tax on consumer items

   Recall one of the principles from Chapter 1: one person’s spending is another person’s income. A high sales tax on consumer items is the same as a high marginal tax rate on income. As a result, the incentive to earn income by working or by investing in risky projects is reduced, since the payoff, after taxes, is lower.

2. The complete loss of a housing subsidy when yearly income rises above $25,000

   If you lose a housing subsidy as soon as your income rises above $25,000, your incentive to earn more than $25,000 is reduced. If you earn exactly $25,000, you obtain the housing subsidy; however, as soon as you earn $25,001, you lose the entire subsidy, making you worse off than if you had not earned the additional dollar. The complete withdrawal of the housing subsidy as income rises above $25,000 is what economists refer to as a notch.