10.9 Exercises

1. Consumption Taxes in Europe vs. the United States (***): Value-added tax (VAT) rates are higher in Europe than the sales taxes in the United States. The reason is that VAT are considered to be self-enforcing. Explain what self-enforcing means in the context of VAT.

2. RST vs. VAT (***): You are the adviser to the state governor who considers the adoption of either a retail sales tax (RST) or a value added tax (VAT). The tax rate will be 9% in any case. For simplicity, assume that we have three production stages. The farmers harvest the wheat and sells it for $100 to the miller. The miller produces flour and sells it for $250 to the baker. The baker produces bread, which is sold at $500 to consumers. What is the tax remittance to the state government at each stage for the RST and the VAT. What is the total tax revenue to the state government.