A nation is considering the possible adoption of a national sales tax. Before it proposes specific legislation, it would like you to consider some of the basic issues that may affect the structure of the tax on consumption. The following are a few facts about the nation’s economy and preliminary comments about the new tax.

About twenty thousand businesses account for about two-thirds of all production and distribution of goods and services in the country. There are a very large number of small retailers that sell goods and render services to final consumers. The remaining third is provided by more than 150,000 retailers and traders. Most of these, including street vendors and small shopkeepers, do not maintain detailed records of their operations. 

The strength of the nation’s economy comes, in large part, from the export both of agricultural products and consumer goods. Its manufacturers also import significant amounts of raw materials and parts for goods that are consumed domestically and that are exported. The government wants the tax to be paid by consumers, but it is concerned about the effects that this new tax may have on the economy. The government also wants to encourage increased investment in new ventures and wants existing firms to modernize in order to remain competitive in the international markets. 

a. Should the government rely on a retail sales tax or a multistage VAT? 

b. Should the government adopt an origin or destination principle consumption tax? 

c. Politically, the government cannot set the tax rate above 5 percent. What difference does it make if it includes or excludes the new tax from the tax base? 

d. Should the government propose a gross national product, national income, or consumption-style tax?