Description

College of Administrative and Financial Sciences
Assignment-2
Deadline: 06/08/2022 @ 23:59
Course Name: Macroeconomics
Student’s Name:
Course Code: ECON201
Student’s ID Number:
Semester: I
CRN:
Academic Year: 1441/1442 H
For Instructor’s Use only
Instructor’s Name:
Students’ Grade:
/15
Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
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The Assignment must be submitted on Blackboard (WORD format only) 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).
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Submissions without this cover page will NOT be accepted.
Assignment 2-Case Study-Chapters: 7, 8, 9 & 12
Case Study
When taxes induce people to change their behavior—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.”
Q1: What should be taxed – Personal Income or Personal Consumption and why? Provide your opinion
based on the case given above. (Minimum 200 words).
[5 Marks]
Q2: How may it affect Saudi Economy if an income tax is imposed in KSA? (Min 200 words)?
[5 Marks]
Q3: In each of the following cases, determine how much GDP and each of its components is
affected?
[5 Marks]
A. Ahmad spends $300 to buy his dinner at the finest restaurant in Boston.
B. Abdul spends $1500 on a new laptop to use it in his software company in KSA. The laptop
was built in China.
C. Jane spends $1200 on a computer to use in her editing business. She got last year’s model on
sale for a great price from a local manufacturer.
D. General Motors builds $500 million worth of cars, but consumers only buy $470 million
worth of them.

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