Suppose Kim's present earning is "I_0" won and future earning is "I_1" won. For any savings or borrowings, an interest rate of r is applied. For simplicity, let us assume that taxation does not change Kim's earnings patterns over the two periods. That is, any tax policy does not alter "I_0" and "I_1". Also, assume that Kim is a borrower in the present period and no deduction is allowed for interest payments 1) If government levies a tax on both earned income and interest income at rate t, can Kim change her mind to save some of her income in the present period rather than borrowing some money to raise her consumption? Explain your answer with an illustration. You may want to explain the associated income and substitution effects. 2. Now consider that the government taxes consumption instead of income. Suppose the consumption tax rate is set to raise the same tax revenue as the income tax yields. Discuss the difference between the consumption and income tax in detail, using your illustration for Q1.

Suppose Kim's present earning is "I_0" won and future earning is "I_1" won. For any savings or borrowings, an interest rate of r is applied. For simplicity, let us assume that taxation does not change Kim's earnings patterns over the two periods. That is, any tax policy does not alter "I_0" and "I_1". Also, assume that Kim is a borrower in the present period and no deduction is allowed for interest payments 1) If government levies a tax on both earned income and interest income at rate t, can Kim change her mind to save some of her income in the present period rather than borrowing some money to raise her consumption? Explain your answer with an illustration. You may want to explain the associated income and substitution effects. 2. Now consider that the government taxes consumption instead of income. Suppose the consumption tax rate is set to raise the same tax revenue as the income tax yields. Discuss the difference between the consumption and income tax in detail, using your illustration for Q1.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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