Recently, there has been talk about reforming the tax system. Some advocate replacing the current income tax with a consumption tax. The income tax taxes interest earned on savings directly, while a consumption tax doesn't. Assuming the demand curve forloanable funds is unchanged, which of the following would most likely occur?

Question

Quizplus · Accepted Answer

Switching from an income tax to a consumption tax encourages savings since interest earned is not taxed. This increases the supply of loanable funds, leading to a lower interest rate and higher quantity of loanable funds demanded and supplied.

Recently, There Has Been Talk About Reforming the Tax System