财政第十版课后答案21

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Part 5 – The United States Revenue System

Chapter 21 – Fundamental Tax Reform: Taxes on Consumption and Wealth

Brief Outline

1. Efficiency and Equity of Personal Consumption Taxes

a. Efficiency Issues b. Equity Issues 2. Retail Sales Tax

a. Rationalizations

b. Efficiency and Distributional Implications of State Sales Taxes c. A National Retail Sales Tax 3. Value-Added Tax

a. Implementation Issues

b. A VAT for the United States? 4. Hall-Rabushka Flat Tax 5. Cash-Flow Tax

6. Income versus Consumption Taxation

a. Advantages of a Consumption Tax b. Disadvantages of a Consumption Tax c. Problems with Both Systems 7. Wealth Taxes

8. Estate and Gift Taxes

a. Rationales b. Provisions

c. Reforming Estate and Gift Taxes 9. Prospects for Fundamental Tax Reform

Suggested Answers to the End of Chapter Questions

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

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Chapter 21 – Fundamental Tax Reform: Taxes on Consumption and Wealth

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. The person receiving the gift owes no tax. b. If the fan keeps the ball, the fan would owe no tax now. But the ball would

become part of his or her estate, taxable after death under the estate tax. c. The fan can avoid tax entirely by giving the ball to a charity, since he could

entirely deduct the value of the ball from his taxable income. The charity could sell the ball; the proceeds from the sale would not be taxed. d. If the fan sells the ball, the fan owes tax on the net proceeds, just as the seller of

any property would. The transaction would put the fan in the highest tax bracket, so that the marginal tax rate on the proceeds would be 35 percent. e. If the fan holds onto the ball for a year, it becomes a long-term capital asset,

subject to the maximum capital-gains tax rate of 28 percent. Unless the fan thinks that there is going to be a substantial drop in the market value of the ball, he or she should hold onto it for a year. 5. The efficiency of this tax seems to be good because it would not change incentives. However, it does increase the likelihood that the government will do it again, as it was done once. 6. Bradford was right. In the simplest possible case, the budget constraint is pC = wH, where p is the price of consumption, C is units of consumption, w is the wage rate, and H is hours of work. With an income tax, pC=(1-t)wH, where t=income tax rate. With a consumption tax, (1+?)pC=wH, where ?=consumption tax rate. Thus, for any income tax rate t, we can find a consumption tax rate, ?, that is equivalent by solving the expression: (1+?)=1/(1-t). 7.

a. We can conclude that an income tax generates an excess burden if it creates a tax

wedge between the amount a borrower pays and the amount a lender receives. With a 25% income tax and an interest rate of 8%, lenders receive (1 – t)r = 6%. Since interest paid is tax deductible, borrowers pay (1 – t)r = 6%. Therefore, there is no tax wedge and no excess burden. b. If interest payments are not tax deductible, then borrowers pay 8%, while lenders

receive 6% after taxes. Since there is a wedge between the two rates, the income tax creates an excess burden in this case.

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Part 5 – The United States Revenue System

c. If the income tax rate is t = 0.25, then (1+?) = 1/(1-0.25) = 4/3, so the equivalent

consumption tax is ? = 1/3. A consumption tax leaves unchanged the market rate of return because the receipt of interest income by itself does not create a tax liability. If interest payments are not tax deductible, there is no wedge between the rate lenders receive and the rate borrowers pay, so there is no excess burden. d. If interest payments are tax deductible, then there is a wedge between the rate

lenders receive and the rate borrowers pay, so the tax creates an excess burden. With a consumption tax rate of 1/3, borrowing $1 and paying 8% interest causes the tax liability to fall and the after-tax interest rate borrowers must pay is (1 – t)r = (2/3)0.08 = 5.36%. In this case, the wedge between the rate lenders receive (8%) and the rate borrowers pay (5.36%) is even larger than for a 25% income tax when interest payments were not tax deductible, so the excess burden is larger. Note that there is an excess burden associated with an income tax only when interest payments are not tax deductible, while there is an excess burden associated with a consumption tax only when interest payments are tax deductible 8. Under an income tax, Amy's burden is $1,000*t in the first period, and .08($800)t in the second period (e.g., her investment income is taxed). Shirley's burden is identical in the first period, $1,000*t, but is lower in the second period, equal to .08($700)t. This is because Shirley consumed more in the first period and saved less. Thus, Amy has a higher lifetime tax burden because she has higher investment income. Under a proportional consumption tax, Amy and Shirley have the same lifetime tax burden, $1,000*?, where ? is the consumption tax rate. 9. The corporation earns a 7% return, but must pay 35% of its return in taxes. In addition, Aviva must pay 15% in taxes on the annual dividends she receives. This yields an after-tax rate of return of 3.8675% [=.07(1-.35)(1-.15)]. Applying this net rate of return for 25 years to an investible income of 65 cents results in $1.68 [=.65(1.038675)25]. This is the amount that Aviva will have in her account 25 years from now for each dollar she earns today. After subtracting a 45% estate tax, her family receives $.92 for each dollar earned today. If there were no taxes, $1 would compound annually at 7%, yielding a payout of $5.42 [=1.0725] to her family.

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