Question 1

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

Accepted Answer

A tax on comprehensive consumption is equivalent to a tax on labor income because it taxes the income that is not saved. Essentially, what is not saved (or invested) is spent, and taxing this spending is akin to taxing the income from labor that is used for consumption.

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.

Accepted Answer

A flat-rate tax on comprehensive consumption can yield the same revenue as a flat-rate tax on comprehensive income at different rates because the bases of the two taxes are different. The consumption tax is levied on spending, while the income tax is levied on income earned, leading to different amounts of taxable base and potentially requiring different rates to generate the same revenue.

Question 3

A consumption tax is the same as an income tax.

Accepted Answer

A consumption tax is a tax on spending whereas an income tax is a tax on earnings. They are not the same thing.

Question 4

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

Accepted Answer

Under a consumption tax, borrowing money increases the amount of consumption in the current year, which leads to higher taxes being due in that year.

Question 5

A sales tax encourages saving and discourages consumption.

Accepted Answer

A sales tax increases the cost of goods and services, which can discourage consumption as people may buy less to avoid paying higher prices. This can lead to increased saving as individuals choose to hold onto their money rather than spend it.

Question 6

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

Accepted Answer

A tax on comprehensive consumption, also known as a consumption tax, is levied on the total amount of goods and services consumed by an individual or household. This type of tax does not directly affect investment markets or the efficiency of those markets. Investment decisions are based on factors such as risk, return, and economic conditions, rather than tax rates. Therefore, a consumption tax is unlikely to prevent the attainment of efficiency in investment markets.

Question 7

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

Accepted Answer

Comprehensive consumption is calculated by subtracting changes in net worth from comprehensive income, focusing on actual consumption rather than changes in wealth.

Question 8

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

Accepted Answer

Annual comprehensive consumption (what is spent on goods and services) will equal annual comprehensive income (what is earned) if there is no savings. This is because savings is the amount of income that is not spent on consumption, so if there is no savings, all the income must have been spent on consumption.

Question 9

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

Accepted Answer

The answer of A comprehensive consumption tax will not prevent...

Question 10

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

Accepted Answer

A consumption tax would be levied on all goods and services that consumers spend their money on, including those that are purchased using labor income. Therefore, 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.

Accepted Answer

Under a comprehensive consumption tax, individuals are only taxed on their consumption, not on their income. However, if an individual saves income instead of spending it, they will not be taxed on that income in the current year, but they will be liable for taxes when they eventually spend that saved income in the future. Therefore, 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.

Accepted Answer

The value-added tax (VAT) in Europe does not typically exclude services from the tax base. Services are generally subject to VAT in most European countries.

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.

Accepted Answer

The discounted present value of income taxes paid by two individuals with equal lifetime labor earnings but different savings rates can differ due to the timing of tax payments and the impact of investment income taxes. If one saves more, they might generate more investment income, which could be taxed differently than labor income, affecting the total present value of taxes paid.

Question 14

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

Accepted Answer

The value-added tax (VAT), collected through the invoice method, exempts intermediate purchases from taxation. This means that businesses can deduct the VAT they paid on their own inputs (materials, services, etc.) from the VAT they collected on their sales before remitting the difference to the government, resulting in only the value they added to the product or service being taxed. This avoids double taxation and promotes efficiency in the supply chain.

Question 15

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

Accepted Answer

The answer of Substituting a comprehensive consumption tax for an...

Question 16

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

Accepted Answer

This statement is true. Investment goods, which are intended for use in the production of goods and services, are typically exempt from value-added tax in Western Europe to encourage economic growth and investment.

Question 17

A flat-rate tax on comprehensive consumption:

Accepted Answer

A flat-rate tax on comprehensive consumption does not create a wedge between the gross interest rate paid by borrowers and the net interest rate received by savers, as it is applied uniformly to consumption rather than income or interest.

Question 18

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

Accepted Answer

Sales taxes in the United States do not generally tax all personal services. The taxation of personal services varies by state and even by individual service. Some states may exempt certain services from sales tax, while others do not. Generally, personal services such as haircuts and nail services are subject to sales tax, while professional services like legal and accounting services are often exempt.

Question 19

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

Accepted Answer

The retail sales tax is generally a source of revenue for state and local governments, not the federal government.

Question 20

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

Accepted Answer

A comprehensive consumption tax is more favorable to the incentive to save because it taxes consumption instead of income or savings. Individuals who save more and consume less will be taxed less, incentivizing savings behavior. On the other hand, a comprehensive income tax taxes both income and savings, potentially disincentivizing people from saving.

Quiz 16: Taxes on Consumption and Sales

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