Question

1. "The role of taxation can be seen in three main areas" – Explain the three main areas of taxation. (6 marks)

Answer 1

First, that the consumption tax is more efficient because it does not discriminate between current and future consumption, while both income and consumption taxes have identical effect on work effort. Second, that the consumption tax is at least as good at redistribution as the income tax, and thus can equally satisfy vertical equity. Third, that the consumption tax is easier to administer than the income tax because it makes no attempt to tax income from capital and thus can omit many of the vexing complica- tions that arise from such an attempt, like accounting for basis.