What consumption tax rate would yield the same tax revenue

Assignment Help Finance Basics

Reference no: EM131500356

Question: Rich lives two periods. His earnings in the present are 100; in the future they are 75.6. The interest rate is 8 percent.

a. Suppose that Richs earnings are subject to a 25 percent tax. Suppose also that interest earnings are taxed at the same rate and interest paid is tax deductible. Using our life-cycle model, show that this tax generates an excess burden

b. Suppose now that interest payments are not tax deductible. Does this tax generate an excess burden if Rich is a borrower?

c. Now assume the tax in pail a is scrapped in favor of a consumption tax. What consumption tax rate would yield the same tax revenue? Does this tax distort the choice between present and future consumption?

d. Now assume the consumption tax in part c is instituted, but the deduction of interest payments remains. Does this tax distort the choice between present and future consumption?

Reference no: EM131500356

Questions Cloud

The application of behaviorism : The Application of Behaviorism : Summary of Behaviorist Theorists: From this module/week's reading, prepare a summary .

Risk-averse investors will hold a portfolio of safe stocks : More risk-averse investors will hold a portfolio of safe stocks with lower expected return and lower volatilities.

American customer satisfaction index : According to the American Customer Satisfaction Index, which of the following conditions exists relative to overall customer satisfaction with US

Description of medication : PCN-501: Pharmacotherapy Chart. Complete the following Pharmacotherapy chart. For each "Purpose of Medication," list the name of a medication that is used for the purpose listed

What consumption tax rate would yield the same tax revenue : Rich lives two periods. His earnings in the present are 100; in the future they are 75.6. The interest rate is 8 percent.

What benefits are provided by constant service time model : What benefits are provided by constant service time model? Discuss advantages and disadvantages of queuing theory for an organization in the service industry.

Portfolio of the stock and the risk-free asset : portfolio of the stock and the risk-free asset.

Aviation maintenance safety : Explain what safety programs you would enhance, develop, or establish to mitigate those weaknesses?

Pension fund has an average duration of its liabilities : A pension fund has an average duration of its liabilities equal to 15 years.

User Account

All Pages