Exam 25: Fundamental Tax Reform and Consumption Tax

Which statement about changing the current tax system in the U.S.to a cash-flow tax system is TRUE?

Making the transition from the current income tax system to a flat tax system would be likely to cause:

Assume that two people have the same income.Under the U.S.tax code,someone who chooses to save some income to consume more later is taxed _________ than someone who chooses to spend all of the income now,which is ________.

Suppose the government is considering replacing the current income tax system with either a national sales tax or a value-added tax.Would one of these alternatives be more desirable than the other in terms of compliance? Explain.

Suppose that there is an income tax increase in the United States.Empirical evidence suggests that one channel through which tax rate changes can affect tax revenues will be LEAST responsible for eroding the tax base.What is it?

Suppose that,as a result of a tax rate increase,you decide to work fewer hours.This is an example of which channel through which tax rate changes can change tax revenues?

Suppose that,in place of the progressive income tax,a nation is considering adopting a national sales tax of 25% on all goods. (a)If the politicians want to use a sales tax but also want the tax to be progressive,what could they do? Evaluate this option in terms of what you know about optimal commodity taxation. (b)Would all groups be affected by the transition to a consumption tax in the same way? Explain.

Which statement about a value-added tax is TRUE?

The share of total national revenue from consumption taxation is approximately ________ in the United States.

Suppose that you respond to an income tax increase by contributing more money to your individual retirement account.This is an example of:

Under the current U.S.tax code,saving in the form of real estate is:

Changes to the tax code made in 1993,1997,2001,2003,and 2012 have:

An excise tax is a tax on ________; a value-added tax is a tax on __________.

In the theory of tax evasion,increasing the risk of getting caught _____ the marginal cost of tax evasion; reducing the penalty associated with tax evasion _____ the marginal _____ of tax evasion.

Suppose the government of Mascolia is considering replacing its income tax system with a consumption tax.Assume that the government's revenue requirement would be the same under either system. (a)How would the base of a consumption tax compare with the base of an income tax? Does this have implications for the magnitude of the tax rate on consumption versus the magnitude of the tax rate on income? Explain. (b)Compare the income tax and consumption tax in terms of vertical equity,assuming that both tax all people at the same rate (for example,a 20% tax on income and a 20% sales tax).

Identify and describe two political reasons the tax code is so complicated.

Suppose the personal income tax rate is reduced and the penalties associated with tax evasion are reduced.Holding all else constant,which of the following must be TRUE?