income tax v sales tax

income tax v sales tax - 6.f Income Tax vs Sales Tax...

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6.f. Income Tax vs. Sales Tax Suppose that you must pay $100 in tax, but the government gives you a choice of paying the $100 either as a sales tax on some good or as an income tax. Since your tax payment would be $100 either way, it might seem that you would not care which kind of tax you pay. But we can use indifference curves and budget lines to show that you would always prefer a $100 income tax to a $100 sales tax. The consumer in figure 6.f.1 initially locates at point A, on the untaxed budget line. A sales tax on good x will make x more expensive, thus rotating the budget line to the left as shown, and leaving the consumer at point B on the ‘after sales tax’ budget line, consuming x B units of x and y B units of y. To see how much tax the consumer is paying, imagine that he had tried to consume x B units of x before the tax was imposed. He would have been able to locate at point D, consuming x B units of x and y D units of y. Thus, we can think of the tax as taking away (y D -y B ) units of y from the consumer. Assume that
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