Question

what happens to consumption and leisure if a lump sum tax (raises same revenue as income tax) is introduced instead if income tax.

Answer 1

lumpsum tax is a taxation system  in which the taxpayer is assessed the same amount regardless of circumstance.example tag fees on vehicles, which are the same regardless of the income of vehicle owners.

effect on consumption

From a supply-side perspective, growth-friendly taxes are those that distort people's behavior less: A lump-sum tax, with everyone paying a fixed amount, is the most efficient.a lump-sum tax should have exactly zero effect on consumption and output according to theory of  Ricardian equivalence. Lump-sum tax is a very efficient taxation system because it does not reduce people's incentive to work because the tax do not vary with the income they earn. Administrative burden also minimised howerver,The income effect shows that consumption will decrease. As the lumpsum tax, has no substitution effect, the relative price does not change. The income effect shows that both consumption and leisure will be lower than before.

effect on leisure consumption

A lump-sum tax causes a parallel shift in the budget constraint, without causing any changing in the slope.The amount of the lump-sum tax is the same no matter how many hours of leisure are chosen – it equals the vertical distance between point h and point i.howerver But as stated earlier The income effect shows that leisure will decrease. For the lumpsum tax, there is no substitution effect because the relative price does not change. The income effect shows that both consumption and leisure will be lower than before.