1. Suppose there is a consumption tax of 20 percent. An individual earns $100 and saves $30. Her tax will be equal to ________ .
2. A sales tax that is levied at all stages of production is known as a(n) ________tax.
3. Most capital gains accrue to low-income individuals because there are more of them. ________ (True/False)
4. Under our current corporate tax system, earnings from corporations that are paid out as dividends are taxed________ times.
5. Traditional and Roth IRAs. With a traditional IRA, you get to deduct the amount you contribute from your current taxable income, invest the funds free from tax, but then pay taxes on the full amount you withdraw when you retire. Suppose your tax rate is 50 percent and you initially deposit $2,000 in an IRA. The proceeds double in seven years to $4,000. You then retire and pay taxes on the $4,000 at your 50 percent rate.
a. Taking into account your tax deduction for the IRA, how much did your investment in the IRA really cost you? What is your return after seven years?
b. With a Roth IRA, you do not get a deduction for your savings but the interest you earn is tax free. Is the outcome for a Roth IRA the same as for the traditional IRA if you invest $1,000 for seven years and double your initial investment?
c. Suppose you believed that in seven years tax rates would be higher. Are the traditional and Roth IRAs still equivalent? If not, which would you prefer?
6. Tax Policy and National Savings. Suppose the government launches a new program that allows individuals to place funds of up to $2,000 in a tax-free account. Do you believe that this will have a significant effect on national savings? (Recall that federal deficits reduce national savings.) What are the arguments on both sides of this debate?
7. Why Has the United States Not Instituted a VAT? The United States differs from virtually all developed countries in that it does not have a VAT. What important aspect of the U.S. political system might account for this difference with other countries?