Assume the federal government replaces the federal income tax with a sales tax placed on consumption...

Assume the federal government replaces the federal income tax with a sales tax placed on consumption expenditures. Analyze the impact of this tax change on taxation efficiency and equity.

Expert Solution

It would definitely be more efficient. The compliance costs with corporate and individual income taxes is large relative to the revenue collected. In fact there are parts of the tax code where compliance is MORE than the amount of tax collected. By definition it would be more equally borne, since almost half of the households don't pay any individual income tax today. It would be a proportionate tax over time because everyone would be taxed the same amount of his consumption. In a snapshot mode, it would be more unequal because savings rates differ. In the longer run, while you can defer the tax until you spend, you cannot avoid it. People with high savings rates would simply pay a lot in retirement.
This latter aspect is a major objection. For someone who is, say, 60, they have been taxed heavily on their INCOME for their entire life, and now this change would tax them AGAIN on the money they have saved and will later spend. That's probably not exactly the definition of "equity".

Rahul Sunny answered 2 years ago

Assume the federal government replaces the federal income tax with national sales tax on all consumption...

Assume the federal government replaces the federal income tax with national sales tax on all consumption expenditures. Analyze the impact of this tax change on taxation efficiency and equity. Note that the federal government already collects a nationwide consumption tax through excise taxes on gasoline, liquor, and tobacco.

Suppose the government of Mascolia is considering replacing its income tax system with a consumption tax....

Suppose the government of Mascolia is considering replacing its income tax system with a consumption tax. Assume that the government's revenue requirement would be the same under either system. (a) How would the base of a consumption tax compare with the base of an income tax? Does this have implications for the magnitude of the tax rate on consumption versus the magnitude of the tax rate on income? Explain. (b) Compare the income tax and consumption tax in terms of...

uppose the government of Mascolia is considering replacing its income tax system with a consumption tax....

uppose the government of Mascolia is considering replacing its income tax system with a consumption tax. Assume that the government's revenue requirement would be the same under either system. (a) How would the base of a consumption tax compare with the base of an income tax? Does this have implications for the magnitude of the tax rate on consumption versus the magnitude of the tax rate on income? Explain. (b) Compare the income tax and consumption tax in terms of...

A student makes the following statement: “If the federal government raises the sales tax on gasoline...

A student makes the following statement: “If the federal government raises the sales tax on gasoline by $0.25, then the price of gasoline will rise by $0.25. Consumers can’t get by without gasoline, so they have to pay the whole amount of any increase in the sales tax.” Under what circumstances will the student’s statement be true? Illustrate your answer with a graph of the market for gasoline.

Redistribution of income occurs through the federal income tax and government antipoverty programs. Explain whether or...

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Suppose government puts a tax on consumption at rate τc, that is, τc fraction of consumption...

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There are two types of taxes: Federal tax and province tax. 1.Federal taxes: Assume that the...

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For each situation, indicate the effects on consumption and saving in the economy: The federal government...

For each situation, indicate the effects on consumption and saving in the economy: The federal government increases payroll taxes. The Federal Reserve reduces key interest rate targets. Consumers are fearful of a possible recession. There is an increase in rent and mortgage payments for housing. NO HAND-WRITE PLEASE

12.) The most common term for a consumption tax is: wealth tax. progressive tax. sales tax....

12.) The most common term for a consumption tax is: wealth tax. progressive tax. sales tax. income tax. QUESTION 13 Which of the following is a consumption tax? Ad valorem tax Real estate tax Excise tax Personal property tax QUESTION 14 In order to compare the yields on municipal and corporate bonds the investor must restate the yield of either the taxable corporate bond to an after tax basis or the municipal bond to a pretax equivalent because: corporate bonds...

Tatun Inc. pays state income tax at a 5% rate and federal income tax at a...

Tatun Inc. pays state income tax at a 5% rate and federal income tax at a 21% rate. Tatun recently engaged in a transaction in Mexico, which levied a $25,200 income tax on the transaction. Tatun's pretax net income for the current year is $1,913,900. Compute Tatun's total income tax burden assuming that: The Mexican tax is nondeductible for state and federal tax purposes. The Mexican tax is deductible for state and federal tax purposes.

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