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 equiv-
alent.
(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

Solution

(g) Monopoly will completely shift any tax burden to buyers because in a monopoly the seller is the price setter and not the price taker.In other words,the seller has the pricing power so he will pass on his /her tax burden to the consumer by increasing the prices of the goods sold. - TRUE

(f) If we collect the commodity tax from sellers,market price of the commodity will generally always increase because they pass on the tax burden to the buyers. - TRUE

(e) Progressive income tax scheme is necessarily involved with increasing marginal tax rate - TRUE because under progressive income tax scheme,the people with higher incomes will have to pay higher percentage of their incomes as tax when compared to the people with low income.

(d) We can eradicate underground economy by imposing heavy tax - FALSE - because imposing heavy tax reduces the incentive for the sellers to do business rightfully.So,in the process of increasing their profits they retort to unfair trading practices by not paying taxes which leads to growth in underground economy / parallel economy / black market.

(c) By increasing the corporate income tax we can reduce income inequality - TRUE - because corporates are owned / held by some individuals who will be belonging to the high levels of income.So,increasing the corporate income taxes rate,will imply the more money will flow from the wealthy individuals to the government in the form of taxes. Government will then utilize this increased revenue towards subsidies and other welfare schemes (mostly targeted towards low income people) which will ensure income equality.

(b) If we use wage rate as basis of taxation,it satisfies horizontal equity - TRUE - It is same as saying progressive income tax scheme under which the individuals with higher income will pay more taxes.This will ensure horizontal equity.

(a) FALSE - because the ENTIRE INCOME IS NOT SPENT ON CONSUMPTION.There will be SAVINGS.

Income tax is tax charged when you earn income.Consumption tax is charged when you spend. So they are not equivalent.

If Govt.wants to increase its revenue and to ensure income equality,it will increase the income tax. But if it wants to reduce the consumption /demand in an economy it will impose consumption tax.

Increase in income tax (progressive income tax) leads to lowering of incentive to earn marginal income Whereas increase in consumption tax leads to decrease in the incentive to spend.While the former situation is bad mostly,the latter condition can be utilized by the government positively according to the situation (i.e., when the govt. wants to reduce the consumption in an economy.

Hope this solution helps !! Please comment in case any further clarifications are required.Please give a "ThumbsUp" rating for this solution !!