Deck 16: Taxes on Consumption and Sales 

Question 1

Assuming that a person never receives any cash gifts or bequests, a tax on comprehensive consumption is equivalent to a(n):

A)tax on capital income.
B)tax on labor income.
C)income tax.
D)wealth tax.

Answer 1

tax on labor income.

Question 2

If a flat-rate tax on comprehensive consumption yields the same revenue as a flat-rate tax on comprehensive income, the tax rate for the two taxes must be equal.

Answer 2

False

Question 3

A consumption tax is the same as an income tax.

Answer 3

False

Question 4

Under a consumption tax, borrowing money will increase taxes that are due in the year the funds are borrowed.

Question 5

A sales tax encourages saving and discourages consumption.

Question 6

A tax on comprehensive consumption will not prevent the attainment of efficiency in investment markets.

Question 7

Comprehensive consumption is measured by excluding increments in net worth from comprehensive income.

Question 8

Annual comprehensive consumption is equal to annual comprehensive income if there is no annual savings.

Question 9

A comprehensive consumption tax will not prevent labor markets from attaining efficiency.

Question 10

A comprehensive consumption tax is equivalent to a comprehensive tax on labor income.

Question 11

Under a comprehensive consumption tax, liability for payment of taxes on the amount of income saved in any year is deferred rather than eliminated.

Question 12

As used in Europe, the value-added tax typically excludes services from the tax base.

Question 13

If two persons have equal labor earnings over their lifetimes and never receive any gifts or inheritances, then the discounted present value of income taxes that they pay will be the same despite any differences in their rates of saving.

Question 14

The value-added tax, collected through the invoice method, exempts intermediate purchases from taxation.

Question 15

Substituting a comprehensive consumption tax for an equal-yield comprehensive income tax will reduce excess burden in the labor market.

Question 16

The value-added tax as used in Western Europe generally exempts investment goods from taxation.

Question 17

A flat-rate tax on comprehensive consumption:

A)will reduce the market rate of interest.
B)will reduce net interest received by savers in any given year.
C)will not result in any difference between the gross interest rate paid by borrowers and the net interest rate received by savers.
D)causes no loss of efficiency in labor markets.

Question 18

Sales taxes in the United States generally tax all personal services.

Question 19

The retail sales tax is a major source of revenue for the federal government in the United States.

Question 20

A comprehensive income tax is more favorable to the incentive to save than a comprehensive consumption tax.

Question 21

The value-added tax used in the European Union:

A)generally exempts services from taxation.
B)requires all taxpayers to report value added.
C)exempts investment purchases from taxation.
D)taxes all transactions at the same low rate.

Question 22

The differential incidence of substituting a tax on comprehensive consumption for a tax on comprehensive income is likely to be:

A)regressive.
B)progressive.
C)proportional.
D)uncertain.

Question 23

The invoice method of collecting the value-added tax:

A)requires firms to compute value added.
B)taxes a firm's sales at a fixed rate but allows a credit for taxes paid on purchases of intermediate goods.
C)requires firms to pay a fixed rate of taxation on both sales and purchases.
D)taxes only intermediate purchases at a fixed rate.

Question 24

A consumption-type, value-added tax:

A)will not cause losses in efficiency in labor markets.
B)will not cause losses in efficiency in investment markets.
C)taxes interest income.
D)both (a) and (b) are correct.

Question 25

A cash-flow tax is:

A)a modified version of a consumption tax.
B)a modified version of an income tax.
C)a tax that allows some savings to be excluded from tax.
D)both (a) and (c) are correct.

Question 26

In most states, the retail sales tax can be regarded as equivalent to a:

A)comprehensive tax on consumption.
B)comprehensive tax on income.
C)set of selective excise taxes.
D)tax on the profits of retailers.

Question 27

A direct tax on comprehensive consumption:

A)requires taxpayers to report their annual income.
B)requires taxpayers to report their annual savings.
C)taxes savings.
D)both (a) and (b) are correct.

Question 28

A tax on comprehensive consumption:

A)will not influence a taxpayer's work-leisure choice.
B)will not affect the incentive to save in ways that cause losses in efficiency.
C)is likely to reduce saving.
D)will exempt consumption of personal services from taxation.

Question 29

Consumption-in-kind:

A)is exemplified by services provided and consumed in the household.
B)is the same as income-in-kind.
C)is easily determined.
D)both (a) and (b) are correct.

Question 30

Substitution of an equal-yield general consumption tax for an income tax will:

A)improve efficiency in investment markets.
B)impair efficiency in the labor market.
C)increase taxes paid by those earning interest on income.
D)both (a) and (b) are correct.

Question 31

Suppose two individuals earn the same salary each year over their lifetimes.One individual saves 25 percent of his income each year, while the other saves nothing.Over their lifetimes under a comprehensive income tax, the

A)discounted present value of taxes paid will be the same for both.
B)discounted present value of taxes paid will be greater for the saver.
C)discounted present value of taxes paid will be greater for the nonsaver.
D)saver will pay no tax on his interest income.

Question 32

Proponents of a consumption tax have argued that the tax can ultimately increase labor incomes and actually prove to be more equitable in the long run than an income tax.Indicate the net gains possible from substituting a consumption tax for an income tax in the United States.In your answer be sure to indicate your assumptions about the tax base and the conditions in the relevant markets.

Question 33

Which of the following statements about taxes on consumption are true?

A)Taxes on consumption do not distort choices between current and future consumption in ways that impair efficiency.
B)Taxes on consumption have the same economic effects as taxes on income.
C)Taxes on consumption are likely to reduce saving.
D)Taxes on consumption have no effect on real wages.

Question 34

As administered in most states in the United States, the retail sales tax:

A)has zero excess burden.
B)distorts the choice between taxed goods and untaxed services, resulting in some efficiency loss.
C)taxes all services.
D)discourages saving.

Question 35

An adult's life cycle is considered to begin:

A)at 18 years of age.
B)at 21 years of age.
C)upon earning fulltime employment.
D)none of these are correct.

Question 36

Suppose a consumption-type, value-added tax is introduced as a new source of revenue in the United States.Briefly describe the way the tax would work and how it would affect efficiency in labor markets and investment markets.

Question 37

Comprehensive consumption is:

A)equal to comprehensive income.
B)comprehensive income plus savings.
C)comprehensive income minus savings.
D)excludes services.

Question 38

Which of the following is taxable under a consumption tax system?

A)Savings
B)Contributions to Social Security
C)Contributions to retirement funds
D)A bequest at death

Question 39

Which of the following taxes is likely to be most favorable for capital accumulation?

A)A comprehensive income tax
B)A comprehensive tax on wealth
C)A comprehensive tax on consumption
D)An excise tax on gasoline

Question 40

Nicholas Kaldor argued:

A)consumption is a better index of the ability to pay than income.
B)savings entails sacrifice and results in no increase in well-being.
C)consumption provides little personal satisfaction and should be taxed for that reason.
D)both (a) and (b) are correct.