Chapter_21_v2

Chapter_21_v2 - Part 5 The United States Revenue System...

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Part 5 – The United States Revenue System Chapter 21 – Fundamental Tax Reform: Taxes on Consumption and Wealth 1. a. The income tax is 50 percent, so Zach pays 50%*$10000 = $5000 in income taxes in the first period. He saves half of what is left after taxes and earns 10%, therefore he saves $2,500 and earns $250 in interest, but pays half of that interest, $125, in taxes. The present value of his lifetime tax payments is $5000 + $125/1.1 = $5113.64 b. In the second period, Zach has savings and interest equal to $2750. He will use all this savings on consuming and paying consumption taxes. He will pay $1375 in consumption taxes, so the present value of his tax payments is now $5000 + 1375/1.1 = $6247.73 These calculations demonstrate the transitional problem in moving to a consumption tax because Zach had to pay high taxes during period 1 when he earned most of his income, and then had to pay high taxes during period 2 when he did his consuming. 2. The burden of the estate tax includes the resources used in estate planning and the effects of estate planning. Many families may alter their behavior in reaction to the estate tax and, if this results in less efficiency, the estate tax creates an excess burden that is not reflected by the number of taxable estates or the amount of tax revenue collected. 3. There is a fundamental confusion here. There is no reason to assume that the incidence of a general consumption tax (a VAT) will be the same as the incidence of a partial factor tax (corporate income tax). 4. a. For a fan giving a million-dollar ball to McGwire or Sosa, there would be a federal gift tax liability. Depending on the fan's circumstances, it could reach $150,000 or more. The person receiving the gift owes no tax. b.
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Chapter_21_v2 - Part 5 The United States Revenue System...

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