Suppose a country has a consumption tax that is similar to a state sales tax.If its government were to eliminate the consumption tax and replace it with an income tax that includes an income tax on interest from savings,what would happen?
A)There would be no change in the interest rate or saving.
B)The interest rate would decrease and saving would increase.
C)The interest rate would increase and saving would decrease.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

If the government replaces the consumption tax with an income tax that includes an income tax on interest from savings, people will have less incentive to save because their savings will be taxed. This decreases the supply of loanable funds, which drives up the interest rate. As the interest rate increases, people may find it less attractive to save, and so the overall level of saving in the economy can decrease.

Suppose a Country Has a Consumption Tax That Is Similar