Comment on equity of income versus a consumption tax

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Reference no: EM131323233

Suppose two workers earn labor incomes of $20,000 per year in each of three years. One worker saves 20 percent of her labor earnings in each of the first two periods, and spends all her savings and accumulated interest in the final period. The other worker never saves any of her labor earnings. Assume that the interest rate and the discount rate are both 10%.

a. Calculate comprehensive income and comprehensive consumption for each worker in each year.

b. Calculate the present value of taxes paid by each worker under an annual comprehensive income tax at a rate of 15% per year.

c. Calculate the present value of taxes paid by each worker under an annual comprehensive consumption tax at a rate of 15% per year.

d. Which tax collects more revenue? Why?

e. Comment on the equity of an income versus a consumption tax.

Reference no: EM131323233

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