Question

Indicate whether the following statements are true, false, or uncertain. Explain why. (a) As income is eventually spent on consumption, income and consumption taxes are equivalent. (b) If we use wage rate as basis of taxation, it satisÖes horizontal equity. (c) By increasing corporation income tax rate, we can reduce income inequality. (d) We can eradicate the underground economy by imposing heavy tax. (e) Progressive income tax scheme is necessarily involved with increasing marginal tax rate. (f) If we collect the commodity tax from the sellers, market price of the commodity will always increase. (g) Monopoly Örm will completely shift any tax burden to buyers.

Answer 1

(a) False - Income and Consumption Taxes are not equivalent. Increasing the income taxes,will reduce the incentive to earn more whereas the increasing the consumption will reduce the incentive to spend more.

When compared to consumption tax,the income tax is more centric and the govt.has more control over it.

When income is earned,the tax has to be payed.It is different percentage for different levels of income.

In case of consumption tax,people can save on consumption tax by manipulation (generally lower tax rate for lower consumption,so they can smoothen their purchases in order to avoid higher tax)

(b) True - Yes higher income people will have to pay higher percentage of taxes

(c) True - Generally big corporations are majorly held by high net worth individuals(at least in terms of % of ownership).So,higher corporation tax ensures higher revenue to the govt resulting more spending towards welfare schemes which will ensure income equality.

(d) False - Higher taxes lead to tax evasion which means increase in underground economy

(e) True - Yes

(f) True - Yes,the sellers pass on the tax to the buyers by increasing the market price of the goods

(g) True - Since in a monopoly the sellers have pricing power over the buyers,they shift the tax burden completely to them in the form of increased prices in the goods.