Changing the basis of taxation from income earned to amount spent will
A)necessarily reduce tax revenues.
B)lower effective interest rates on savings.
C)distort incentives to earn income.
D)eliminate disincentives to save.

Question

Quizplus · Accepted Answer

If the basis of taxation is changed from income earned to amount spent, disincentives to save would be eliminated. Currently, income is taxed before it can be saved or invested, and the returns on those savings and investments are also taxed. This creates a disincentive to save and invest, as individuals see a significant portion of their returns being taken away through taxation. If spending were taxed instead, individuals would be encouraged to save and invest, as those funds would not be subject to taxation. However, it is important to note that this could also lead to reduced tax revenues, as the government would be collecting less revenue from taxing income.

Changing the Basis of Taxation from Income Earned to Amount