Proposal for a radical change in the tax system--Taxes on income be eliminated and that a consumption tax be used instead. For a Consumption Tax, the tax base is the difference between income and the amount saved. Consider two taxpayers, Abe and Bo, each have incomes of $20,000. Income tax is 20% and the equivalent consumption tax is 25%.

Abe consumes his entire income, and Ben consumes half and saves half. If no tax option is possible, this will be their behavior. A consumption tax would require Ben to pay lower current taxes, though Ben does not avoid taxes by saving. He postpones the tax until he ultimately consumes his savings. We assume that Abe and Ben live for only two years. Complete the numerical example below, interest rate is 10%. (Show your work!)

Consumption Tax

A: j k(l) m

B: n o(p) q(r)

Calculate the Details of income tax for Abe and Ben. Generate consumption and tax in dollars for each period while providing verbal explanations for each step.

No Tax Cons Tax Year1 consumption Earnings 16000 Nil 4000 B B000 10000 2000 Year No Tax cons Tax A 16000 4000 16640 10000 2000 No Tax Cons Tax Year1 consumption Earnings 16000 Nil 4000 B B000 10000 2000 Year No Tax cons Tax A 16000 4000 16640 10000 2000