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Why doesn't the consumption function C=C(Y-T) include transfer payments?
If we assume that C=MPC(Y-T), and that the MPC assumes that one part of the increase of income goes to savings. But what about transfer payments?
Why isn't the consumption function: C=C(Y-T)+TR ?
Does the MPC also assume space for transfer payments?
Thank you.
Why doesn't the consumption function C=C(Y-T) include transfer payments?
It does, transfers are considered to be negative taxes (see Tresch 2015). If you get transfer payment that would make T negative.
Why isn't the consumption function: $C=C(Y-T)+TR$ ?
Because such specification is simply absurd prima facie. By adding $C=C(.)+TR$ you are claiming that there is linear 1 to 1 correspondence between transfer payment and consumption, regardless of the size of transfer payment and regardless of your regular income for which you assume there is some sort of consumption function, that makes absolutely no sense whatsoever. If you would want to add TR explicitly to consumption function it should be $C=C(Y-T+TR)$, but there is no point in doing so since $T$ already can capture any transfers.
