Suppose two workers earn labor incomes of $20,000 per year in each of three tax accounting periods. 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. The market rate of interest is 10 percent.
Calculate the discounted present value of taxes paid over the three periods for each of the workers under a 15 percent comprehensive income tax. What would be the effect of substituting a comprehensive consumption tax for a comprehensive income tax? Comment on the equity and efficiency aspects of each of the two taxes.