Lecture17e0.ppt

Lecture17e0.ppt - Lecture17FundamentalTax Reform,PartII...

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    Lecture 17  Fundamental Tax  Reform, Part II
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    Outline of Lecture Taxation of consumption Labor vs. consumption taxes Retail sales tax VAT Personal consumption tax Flat tax proposals
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    Taxation of labor income vs.  consumption Ignoring bequests, present value of labor income = present value of consumption With constant tax rate as well, two taxes equivalent: neither distorts savings decisions. Equity and efficiency effects largely the same for these two tax bases
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    Key differences between  labor and consumption taxes Timing of taxes very different, though With liquidity constraints, timing matters Consumption tax greater on young Resulting perception that consumption tax less equitable Consumption tax base includes past savings, so taxes these assets. In particular, starting at any date, PV(C) = PV(L) + A While some consumption taxes have no deductions or exemptions, this needn’t be the case
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    Alternative consumption taxes: Retail sales tax Currently used by U.S. States Can this tax be used by the national government instead of the income tax? (Fair tax proposal) Current tax base narrow due to exemption of services, housing, and some food, introducing additional distortions Evasion rate in the retail sector high, and likely would be much higher if tax rates were higher Tax vulnerable to cross-border shopping
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    Alternative consumption taxes: Value added tax Proportional tax, but rate varies by good How does a VAT work? ALL firms (not just retail firms) taxed on sales
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Lecture17e0.ppt - Lecture17FundamentalTax Reform,PartII...

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