SEU Personal Income & Personal Consumption Tax Case Study

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tion????s – PLEASE READ THEM CAREFULLY
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This assignment is an individual assignment.
Due date for Assignment 2 is 15th November 2021.
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The Assignment must be submitted only in WORD format via allocated folder.
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Assignments submitted through email will not be accepted.
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Students are advised to make their work clear and well presented, marks may be reduced
for poor presentation. This includes filling your information on the cover page.
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Students must mention question number clearly in their answer.
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Late submission will NOT be accepted.
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Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
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All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
Assignment 2
Case Study
When taxes induce people to change their behaviour—such as inducing Jane to buy less pizza—
the taxes cause deadweight losses and make the allocation of resources less efficient. As we have
already seen, much government revenue comes from the individual income tax in many countries.
In a case study in Chapter 8, we discussed how this tax discourages people from working as hard
as they otherwise might. Another inefficiency caused by this tax is that it discourages people from
saving.
Consider a person 25 years’ old who is considering saving $1,000. If he puts this money in a
savings account that earns 8 percent and leaves it there, he would have $21,720 when he retires at
age 65. Yet if the government taxes one-fourth of his interest income each year, the effective
interest rate is only 6 percent. After 40 years of earning 6 percent, the $1,000 grows to only
$10,290, less than half of what it would have been without taxation. Thus, because interest income
is taxed, saving is much less attractive.
Some economists advocate eliminating the current tax system’s disincentive toward saving by
changing the basis of taxation. Rather than taxing the amount of income that people earn, the
government could tax the amount that people spend.
Under this proposal, all income that is saved would not be taxed until the saving is later spent. This
alternative system, called a consumption tax, would not distort people’s saving decisions.
Various provisions of the current tax code already make the tax system a bit like a consumption
tax. Taxpayers can put a limited amount of their saving into special accounts—such as Individual
Retirement Accounts and 401(k) plans—that escape taxation until the money is withdrawn at
retirement. For people who do most of their saving through these retirement accounts, their tax bill
is, in effect, based on their consumption rather than their income.
European countries tend to rely more on consumption taxes than does the United States. Most of
them raise a significant amount of government revenue through a value-added tax, or a VAT. A
VAT is like the retail sales tax that many U.S. states use, but rather than collecting all of the tax at
the retail level when the consumer buys the final good, the government collects the tax in stages
as the good is being produced (that is, as value is added by firms along the chain of production).
Various U.S. policymakers have proposed that the tax code move further in direction of taxing
consumption rather than income. In 2005, economist Alan Greenspan, then Chairman of the
Federal Reserve, offered this advice to a presidential commission on tax reform: “As you know,
many economists believe that a consumption tax would be best from the perspective of promoting
economic growth—particularly if one were designing a tax system from scratch—because a
consumption tax is likely to encourage saving and capital formation. However, getting from the
current tax system to a consumption tax raises a challenging set of transition issues.”
1: What should be taxed – Personal Income or Personal Consumption and why?
Provide your opinion based on the case.
(200 words) [1.5 Marks]
2: How may it affect Saudi Economy if an income tax is imposed in KSA?
(200 words) [1.5 Marks]
Q2: Saudi Arabia’s Ministry of Human Resources recently announced an increase to the monthly
minimum wage from 3000 SAR to 4000 SAR for full-time Saudi workers in April 2021, and
introduced a Labor Reform Initiative (LRI) scheduled to take effect on 14th March 2021.
[2 Marks]
a. Discuss the implications of the above topic.
b. Will this impact unemployment in the country? How?

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Explanation & Answer:
2 Questions

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Unemployment

economists

Personal Income Personal Consumption

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