ACCOUNTING FOR INCOME TAXES Chapter 16 © 2009 The McGraw-Hill Companies, Inc.
Chapter 9: Consumption Taxes 9 - 1 Chapter 9 Consumption Taxes Copyright © 2009 by The McGraw-Hill...
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Transcript of Chapter 9: Consumption Taxes 9 - 1 Chapter 9 Consumption Taxes Copyright © 2009 by The McGraw-Hill...
Chapter 9: Consumption Taxes
9 - 1
Chapter 9
Consumption Taxes
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 9: Consumption Taxes
9 - 2
A household consumption tax
The flat tax and the X-tax
A retail sales tax compared to a value-added tax
Replacing the income tax with a consumption tax
A consumption tax vs. a labor income tax
Which tax is fairest?
Pollution, transportation, and health taxes
Introduction
Chapter 9: Consumption Taxes
9 - 3
A consumption tax is a percentage tax that imposes a burden on a household according to their consumption.
• A percentage tax on the sale of consumer goods
• Tends to be regressive with respect to income
Consumption Taxes
A retail sales tax (RST)
Income Consumption Tax Saving Tax/Income
$20,000 $16,000 $4,000 $0 20%
$100,000 $60,000 $15,000 $25,000 15%
Table 9.1: Burdens from a 25% Retail Sales Tax
Chapter 9: Consumption Taxes
9 - 4
• A value-added tax is a percentage tax on the value that is added at each stage of production.
A Value-Added Tax (VAT)
A Consumption Good (Bread)
Purchases Sales Value-added VAT
Farmer $0 $30 $30 $3
Miller $30 $70 $40 $4
Baker $70 $100 $30 $3
TOTAL $100 $200 $100 $10
Table 9.2: A 10% VAT
Chapter 9: Consumption Taxes
9 - 5
Subtraction method
A Value-Added Tax (VAT)
Credit-invoice method
T = t(S – P)
Miller $4 = 0.1($70 – $30)
T = tS – tP
Miller $4 = 0.1($70) – 0.1($30)
• A VAT is equivalent to a RST
• RST is a consumption tax
• VAT is a consumption tax
• A consumer bears a burden from either according to her consumption spending
Comparing a VAT to a RST
Chapter 9: Consumption Taxes
9 - 6
Exemptions under a RST or a VAT
• Fairness and the fact that consumption taxes are regressive are arguments for exemptions
• Efficiency, administrative costs, and appropriate targeting of the exemptions are arguments against exemptions
• To reduce regressivity, a rebate could be issued
A Household Rebate with a RST or a VAT
Chapter 9: Consumption Taxes
9 - 7
The Flat Tax and the X-Tax
To reduce the regressivity of the VAT is to modify it to become a flat tax or the X-tax.
• A portion of wage income is not taxed (exemption)
• Same as flat tax except…
Flat Tax
X–Tax
• The graduated rates are progressive with respect to labor (not capital) income
• Wages above the exemption are taxed at a single rate
Chapter 9: Consumption Taxes
9 - 8
A Household Consumption Tax• All savings would be tax deductible in the year it occurs• Revenue neutral
History of a household consumption tax
Computing household consumption
A progressive consumption tax on very high consumption
• Could be progressive
• Practical problems
• Do not replace the income tax, add a progressive consumption tax on very high consumption as a supplement
Chapter 9: Consumption Taxes
9 - 9
Replacing the Income Tax with a Consumption TaxTable 9.3: The Impact on Saving
10% Income Tax Income Tax Consumption Saving
Person C $100,000 $10,000 $90,000 $0
Person S $100,000 $10,000 $0 $90,000
TOTAL $200,000 $20,000 $90,000 $90,000
25% Consumption Tax Income Tax Consumption Saving
Person C $100,000 $20,000 $80,000 $0
Person S $100,000 $0 $0 $100,000
TOTAL $200,000 $20,000 $80,000 $100,000
33% Consumption Tax Income Tax Consumption Saving
Person C $100,000 $20,000 $60,000 $20,000
Person S $100,000 $0 $0 $100,000
TOTAL $200,000 $20,000 $60,000 $120,000
Chapter 9: Consumption Taxes
9 - 10
• The horizontal redistribution effect
• The postponement effect
• VAT and RST are regressive
Impact on saving
Replacing the Income Tax with a Consumption Tax
Impact on the distribution of the tax burden
• The incentive effect
Chapter 9: Consumption Taxes
9 - 11
Replacing the Income Tax with a Consumption Tax
Impact on efficiency loss
• Reduces efficiency loss in the choice between saving and consuming
• May increase the efficiency loss in the choice between work and leisure
D
$20
$16
20,000
P
S
L (Annual Hours)
Figure 7.9
(MRPL)
22,000
A
B
D
Chapter 9: Consumption Taxes
9 - 12
Impact on the Distribution of the Tax Burden
Table 9.4 and Table 9.5
Average Income Share of Income
Income Category Pre-tax After Tax Pre-tax After Tax
Lowest Quintile $15,900 $15,300 4.0% 4.8%
Second Quintile $37,400 $33,700 8.5% 9.6%
Middle Quintile $58,500 $50,200 13.3% 14.4%
Fourth Quintile $85,200 $70,300 19.8% 20.6%
Highest Quintile $231,300 $172,200 55.1% 51.6%
All Quintiles $84,800 $67,400 100% 100%
Top 10% $339,100 $246,300 40.9% 37.4%
Top 5% $520,200 $369,800 31.1% 27.8%
Top 1% $1,558,500 $1,071,500 18.1% 15.6%
Chapter 9: Consumption Taxes
9 - 13
• Neither reduce the reward for saving
A Consumption Tax vs. a Labor Income Tax
Initial Deposit
Interest Earned
Taxes Paid on Withdrawal
Retirement Consumption
Y Tax (Saving) $850 $34 $5.10 $878.90
C Tax (Regular IRA) $1000 $40 $156.00 $884.00
W Tax (Roth IRA) $850 $34 $0.00 $884.00
Table 9.6
Similarities
Differences• Fairness• Capital accumulation
Chapter 9: Consumption Taxes
9 - 14
Regressivity
Which Tax is Fairest?
Tax what you take vs. tax what you make
The ant and the grasshopper
• How should “ability-to-pay” be measured?
• Is this fair?
WageSummer
Consump.Tax Saving Interest
Winter Consump.
TaxPV of Taxes
Grasshopper $1000 $800 $200 $0 $0 $0 $0 $200
Ant $1000 $400 $100 $500 $250 $600 $150 $200
Table 9.7
Chapter 9: Consumption Taxes
9 - 15
Pollution Taxes
• Polluters will find it profitable to reduce pollution if:
TAX<• CBO estimates a tax of $100 per ton of carbon would reduce carbon by about 15%
• A carbon tax would also increase federal tax revenue
MARGINAL ABATEMENT COST
Chapter 9: Consumption Taxes
9 - 16
Transportation Taxes
• User fees (tolls) should be used to finance roads
• Tolls are sometimes unfeasible or costly
• Instead of a toll, a gasoline tax is used
• A gasoline tax is inferior to a toll
• The toll should be equal to the wear and tear and congestion each vehicle causes
Chapter 9: Consumption Taxes
9 - 17
Externality argument
• Careful quantitative analysis is required to measure net costs to others
Estimating the optimal taxation
Health Taxes
Internality argument
• The excessive use of an unhealthful product may impose costs on himself that he underestimates
• The excessive use of an unhealthful product may impose a cost on others
Chapter 9: Consumption Taxes
9 - 18
Summary
A household consumption tax
The flat tax and the X-tax
A retail sales tax compared to a value-added tax
Replacing the income tax with a consumption tax
A consumption tax vs. a labor income tax
Which tax is fairest?
Pollution, transportation, and health taxes