Question

One way to make the tax system much simpler and to lower compliance costs would be to abolish the income tax and replace it with a federal retail sales tax (or VAT). A retail-type tax system has which of the following characteristics? (choose all that apply)

A retail sales tax does not easily allow for adjusting for differences in ability to pay among taxpayers

A retail sales tax is in efficient in the sense of minimizing the overall excess burden of taxation.

A retail sales tax increases the incentive to evade taxes because it is collected at the business level

A retail sales tax increases administrative costs to the IRS because it is collected at the business level

A retail sales tax is necessarily regressive

none of the above

Answer 1

1. A retail sales tax does not easily allow for adjusting for differences in ability to pay among taxpayers : TRUE

because in this the tax is based on actual spending rates each individual’s spending capacity according to the yardstick which he applies to himself. Poor have higher marginal propensity to consume and hence they consume more than what they save from the income and hence it doesnt adjust for differences in ability to pay among taxpayers.

2. A retail sales tax is in efficient in the sense of minimizing the overall excess burden of taxation. This is NOT a characterstic of Retail Type Tax System because the tax burden on the business is more than the tax bueden on the individuals.

3. A retail sales tax increases the incentive to evade taxes because it is collected at the business level: This is NOT a characterstic of Retail Type Tax System

Reatil based Tax syetm being broad based and applicable to all sales in business, there is little room for differing interpretations. The scope of disputes, tax avoidance and evasion is much less in this case

4.A retail sales tax increases administrative costs to the IRS because it is collected at the business level. FALSE

Single-rate, broad-based retail tax system would promote economic neutrality among goods and services, minimize compliance burdens for the taxpayer, and minimize administrative costs for IRS.

5. A retail tax is necessarily regressive : TRUE

Reatil Tax is regressive because it hits the poor harder than the rich, in terms of its % effects on your income. That is the commonly accepted definition of regressive.

It affects the poor more because the rate is flat but the poor spend a greater proportion of their money. They have a higher marginal propensity to consume.