Suppose a country has a consumption tax that is similar to a provincial sales tax. If its government eliminates the consumption tax and replaces it with an income tax that includes an income tax on interest from savings, which of the following would most likely happen?
A)There would be no change in the interest rate or saving.
B)The interest rate would decrease, and saving would increase.
C)The interest rate would increase, and saving would decrease.
D)The interest rate would increase, and saving would increase.

Question

Quizplus · Accepted Answer

When the government replaces the consumption tax with an income tax that includes an income tax on interest from savings, individuals will have less incentive to save money since their interest income will be taxed. As a result, there will be a reduced demand for savings, which will cause the interest rate to rise. However, since individuals will be less motivated to save, the total amount of savings in the economy will decrease. Therefore, the interest rate would increase, and saving would decrease.

Suppose a Country Has a Consumption Tax That Is Similar