# ch16 - Chapter 16 Taxes on Consumption and Sales 1...

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1 Chapter 16 Taxes on Consumption and Sales

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2 Consumption as a Tax Base Consumption can be an alternative to income as a measure of ability to pay. Comprehensive consumption: Income-Savings Note that capital gains would not be taxed if it were not spent.
3 An Expenditure Tax An expenditure tax would have the same practical impact as an income tax. Taxpayers would add all sources of income and deduct additions to savings accounts.

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4 Comparing a Tax on Income to a Tax on Consumption Assumptions: Two equally situated 18 year olds with no physical capital Wages = \$30,000 per year Interest rates = 10% Flat rate tax for either consumption or income of 20%. Two earning periods. They have equal ability to pay taxes over their lifetime so they should pay equal taxes over their lifetime.
5 Comparing a Tax on Income to a Tax on Consumption Step 1 An Income Tax I A = I B = \$30,000 S A = 0 S B = \$5,000 T A = \$6,000 + \$6,000/(1+.1) = \$6,000 + \$5,455 = \$11,455 T B = \$6,000 + \$6,100/(1+.1)/(1+.1) = \$6,000 + \$5,545 = \$11,545

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6 Comparing a Tax on Income to a Tax on Consumption Step 2 A Consumption Tax for the Non-Saver Income = Consumption + Consumption Tax +Savings First and Second Year I A = C A + T A + S A \$30,000 = C A + .2 C A + 0 C A = \$25,000 T A = \$5,000 S A = 0 Present Value of All Taxes T A = \$5,000 + \$5,000/(1+.1)
Comparing a Tax on Income to a Tax on Consumption Step 2 A Consumption Tax for the Saver First Year I B = C B + T B + S B \$30,000 = C B +.2 C B + \$5,000 C A = \$20,583.33 T A = \$4,166.66 S A = \$5,000 Second Year I B + Proceeds from Saving = C B + T B \$35,500 = C B + .2 C B C A = \$29,583.33

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ch16 - Chapter 16 Taxes on Consumption and Sales 1...

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