Question 1

The value-added tax used in the European Union:

Accepted Answer

The value-added tax (VAT) in the European Union generally exempts investment purchases from taxation to avoid taxing business inputs and to focus on taxing final consumption.

Question 2

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

Accepted Answer

Substituting a tax on comprehensive consumption for a tax on comprehensive income tends to be regressive because lower-income individuals typically spend a higher proportion of their income on consumption compared to higher-income individuals. This means that lower-income individuals would bear a relatively higher tax burden compared to higher-income individuals under a consumption tax regime.

Question 3

The invoice method of collecting the value-added tax:

Accepted Answer

The invoice method of collecting value-added tax (VAT) involves taxing a firm's sales at a fixed rate while allowing the firm to claim credits for the VAT paid on their purchases of intermediate goods. This method ensures that the tax is effectively levied on the value added by the firm, rather than on the total sales or purchases.

Question 4

A consumption-type, value-added tax:

Accepted Answer

The answer of A consumption-type, value-added tax:
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Question 5

A cash-flow tax is:

Accepted Answer

A cash-flow tax is indeed a modified version of a consumption tax and allows for some savings to be excluded from tax, making both (a) and (c) correct.

Question 6

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

Accepted Answer

The answer of In most states, the retail sales tax...

Question 7

A direct tax on comprehensive consumption:

Accepted Answer

A direct tax on comprehensive consumption requires taxpayers to report their annual income (choice A) as well as their annual savings (choice B). This is because the tax is based on the difference between the person's income and their savings, which represents their consumption. Savings are not taxed directly (choice C), but the tax on consumption can encourage people to save more by reducing the tax burden on savings.

Question 8

A tax on comprehensive consumption:

Accepted Answer

The answer of A tax on comprehensive consumption:
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Question 9

Consumption-in-kind:

Accepted Answer

Consumption-in-kind is exemplified by services provided and consumed in the household, such as cooking, cleaning, and childcare.

Question 10

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

Accepted Answer

Substituting a consumption tax for an income tax can improve investment market efficiency by not taxing savings and investments, thus encouraging more investment. However, it can impair labor market efficiency by potentially discouraging work if the consumption tax is perceived as reducing disposable income.

Question 11

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

Accepted Answer

Under a comprehensive income tax, the saver will pay taxes on both his salary and the interest earned on his savings, leading to a greater discounted present value of taxes paid compared to the nonsaver who only pays taxes on his salary.

Question 12

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.

Accepted Answer

The answer of Proponents of a consumption tax have argued...

Question 13

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

Accepted Answer

Consumption taxes are generally considered to be less distortionary than income taxes because they do not affect the decision to save versus consume, thus not impairing efficiency between current and future consumption.

Question 14

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

Accepted Answer

The retail sales tax distorts the choice between taxed goods and untaxed services, resulting in some efficiency loss. This means that consumers may shift their purchases towards services rather than goods, even if the goods would have been a better fit for their needs or preferences. This could lead to some resources being misallocated and an overall loss of efficiency.

Question 15

An adult's life cycle is considered to begin:

Accepted Answer

The answer of An adult's life cycle is considered to...

Question 16

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.

Accepted Answer

The answer of Suppose a consumption-type, value-added tax is introduced...

Question 17

Comprehensive consumption is:

Accepted Answer

Comprehensive consumption is the amount of income that is spent on goods and services and excludes savings. Therefore, it is equal to comprehensive income minus savings. Option A is incorrect because comprehensive consumption does not include savings. Option B is also incorrect as it suggests that comprehensive consumption includes savings, which is not the case. Finally, option D is incorrect as comprehensive consumption includes services.

Question 18

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

Accepted Answer

The answer of Which of the following is taxable under...

Question 19

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

Accepted Answer

A comprehensive tax on consumption is likely to be most favorable for capital accumulation, as it does not tax savings or investments directly. This allows individuals and businesses to accumulate capital without being penalized through taxation. In contrast, an income tax and a tax on wealth directly tax savings and investments, while an excise tax on gasoline may discourage investment in industries that rely on transportation.

Question 20

Nicholas Kaldor argued:

Accepted Answer

Nicholas Kaldor, a prominent economist, argued that consumption is a better index of the ability to pay taxes than income because it more accurately reflects an individual's ability to spend. He also believed that savings do not entail a sacrifice that reduces well-being, as they are simply deferred consumption. Therefore, both statements (a) and (b) capture aspects of Kaldor's views on taxation and economic behavior.

Quiz 16: Taxes on Consumption and Sales