Question

A comprehensive tax on consumption (like a cash-flow or expenditure tax) as compared to an income tax:

a.       will always be more regressive.

b.       is virtually identical to an income tax in terms of its economic impacts.

c.       is likely to increase saving.

d.       will not tax consumption of personal services like haircuts and dry cleaning.

please provide some explanation please

Answer 1

Option a

A taxation on expenditure taxes all the consumers at the same rate irrespective of the income of the expenditure, unlike direct taxes like Income tax, hence a consumer with a higher income is bound to save more assuming a same consumption level, hence it has a different economic impact than income tax and is regressive in nature.

It will not lead to increase in savings as the people are bound to consume at the bare minimum basic necessities, and a consumer buying decision is expained to a very low level on the taxes.

Also expenditure taxes are levied on personal services.

Hence option a is the answer.