Question
One way to implement a personal consumption tax is to exempt capital income from the current personal income tax. However, several other approaches have been
One way to implement a personal consumption tax is to exempt capital income from the current personal income tax. However, several other approaches have been posited. The first uses current year expenditures on both durable and non-durable goods and services. The second is known as the consumption service base and includes expenditure on non-durables plus the imputed flow of consumption services from the durable asset. As an example, if you buy a stove for $2000 this year and it is expected to provide stove services over the next ten years, then you would include $200 of stove services in the tax base for each of the next ten years. Compare the two bases in terms of their viability and pattern of tax liability over time. What problems arise? Why might the expenditure approach be combined with the capital-income exempt base for the treatment of assets that are used for savings. How would it work?
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