Deck 16: Taxes on Consumption and Sales

Question 1

Annual comprehensive consumption is equal to annual comprehensive income if there is no annual savings.

Answer 1

True

Question 2

A comprehensive consumption tax is equivalent to a comprehensive tax on labor income.

Answer 2

True

Question 3

Sales taxes in the United States generally tax all personal services.

Answer 3

False

Question 4

The retail sales tax is a major source of revenue for the federal government in the United States.

Question 5

The value-added tax, collected through the invoice method, exempts intermediate purchases from taxation.

Question 6

A consumption tax is the same as an income tax.

Question 7

As used in Europe, the value-added tax typically excludes services from the tax base.

Question 8

Comprehensive consumption is measured by excluding increments in net worth from comprehen?sive income.

Question 9

A flat-rate tax on comprehensive consumption:

A) will reduce the market rate of interest.
B) will reduce net interest received by savers in any given year.
C) will not result in any difference between the gross interest rate paid by borrowers and the net interest rate received by savers.
D) causes no loss of efficiency in labor markets.

Question 10

The value-added tax as used in Western Europe generally exempts investment goods from taxation.

Question 11

Assuming that a person never receives any cash gifts or bequests, a tax on comprehensive con?sumption is equivalent to an):

A) tax on capital income.
B) tax on labor income.
C) income tax.
D) wealth tax.

Question 12

If a flat-rate tax on comprehensive consumption yields the same revenue as a flat-rate tax on com?prehensive income, the tax rate for the two taxes must be equal.

Question 13

A sales tax encourages saving and discourages consumption.

Question 14

Under a consumption tax, borrowing money will increase taxes that are due in the year the funds are borrowed.

Question 15

A comprehensive consumption tax will not prevent labor markets from attaining efficiency.

Question 16

Substituting a comprehensive consumption tax for an equal-yield comprehensive income tax will reduce excess burden in the labor market.

Question 17

A comprehensive income tax is more favorable to the incentive to save than a comprehensive con?sumption tax.

Question 18

A tax on comprehensive consumption will not prevent the attainment of efficiency in investment markets.

Question 19

Under a comprehensive consumption tax, liability for payment of taxes on the amount of income saved in any year is deferred rather than eliminated.

Question 20

If two persons have equal labor earnings over their lifetimes and never receive any gifts or inheri?tances, then the discounted present value of income taxes that they pay will be the same despite any differences in their rates of saving.

Question 21

As administered in most states in the United States, the retail sales tax:

A) has zero excess burden.
B) distorts the choice between taxed goods and untaxed services, resulting in some efficiency loss.
C) taxes all services.
D) discourages saving.

Question 22

A cash-flow tax is:

A) a modified version of a consumption tax.
B) a modified version of an income tax.
C) a tax that allows some savings to be excluded from tax.
D) both a and c

Question 23

In most states, the retail sales tax can be regarded as equivalent to a:

A) comprehensive tax on consumption.
B) comprehensive tax on income.
C) set of selective excise taxes.
D) tax on the profits of retailers.

Question 24

Nicholas Kaldor argued:

A) consumption is a better index of the ability to pay than income.
B) savings entails sacrifice and results in no increase in well-being.
C) consumption provides little personal satisfaction and should be taxed for that reason.
D) both a and b

Question 25

Which of the following statements about taxes on consumption are true?

A) Taxes on consumption do not distort choices between current and future consumption in ways that impair efficiency.
B) Taxes on consumption have the same economic effects as taxes on income.
C) Taxes on consumption are likely to reduce saving.
D) Taxes on consumption have no effect on real wages.

Question 26

Proponents of a consumption tax have argued that the tax can ultimately increase labor incomes and actually prove to be more equitable in the long run than an income tax. Indicate the net gains possible from substituting a consumption tax for an income tax in the United States. In your answer be sure to indicate your assumptions about the tax base and the conditions in the relevant markets.

Question 27

A tax on comprehensive consumption:

A) will not influence a taxpayer's work-leisure choice.
B) will not affect the incentive to save in ways that cause losses in efficiency.
C) is likely to reduce saving.
D) will exempt consumption of personal services from taxation.

Question 28

What below is taxable under a consumption tax system?

A) savings
B) contributions to social security
C) contributions to retirement funds
D) a bequest at death

Question 29

Consumption-in-kind:

A) is exemplified by services provided and consumed in the household.
B) is the same as income-in-kind
C) is easily determined.
D) both a and b

Question 30

An adult's life cycle is considered to begin:

A) 18 years old.
B) 21 years old.
C) upon earning fulltime employment.
D) none of the above

Question 31

Suppose two individuals earn the same salary each year over their lifetimes. One individual saves 25 percent of his income each year, while the other saves nothing. Over their lifetimes under a comprehensive income tax,

A) the discounted present value of taxes paid will be the same for both.
B) the discounted present value of taxes paid will be greater for the saver.
C) the discounted present value of taxes paid will be greater for the nonsaver.
D) the saver will pay no tax on his interest income.

Question 32

The value-added tax used in the European Union:

A) generally exempts services from taxation.
B) requires all taxpayers to report value added.
C) exempts investment purchases from taxation.
D) taxes all transactions at the same low rate.

Question 33

Which of the following taxes is likely to be most favorable for capital accumulation?

A) a comprehensive income tax
B) a comprehensive tax on wealth
C) a comprehensive tax on consumption
D) an excise tax on gasoline

Question 34

Substitution of an equal-yield general consumption tax for an income tax will:

A) improve efficiency in investment markets.
B) impair efficiency in the labor market.
C) increase taxes paid by those earning interest on income.
D) both a and b
E) both b and c

Question 35

The differential incidence of substituting a tax on comprehensive consumption for a tax on compre?hensive income is likely to be:

A) regressive.
B) progressive.
C) proportional.
D) uncertain.

Question 36

The invoice method of collecting the value-added tax:

A) requires firms to compute value added.
B) taxes a firm's sales at a fixed rate but allows a credit for taxes paid on purchases of interme?diate goods.
C) requires firms to pay a fixed rate of taxation on both sales and purchases.
D) taxes only intermediate purchases at a fixed rate.

Question 37

A direct tax on comprehensive consumption:

A) requires taxpayers to report their annual income.
B) requires taxpayers to report their annual savings.
C) taxes savings.
D) both a and b

Question 38

A consumption-type, value-added tax:

A) will not cause losses in efficiency in labor markets.
B) will not cause losses in efficiency in investment markets.
C) both a and b
D) taxes interest income.

Question 39

Comprehensive consumption is:

A) equal to comprehensive income.
B) is comprehensive income plus savings.
C) is comprehensive income minus savings.
D) excludes services.