Question

Suppose a country has a consumption tax that is similar to a state sales tax. If its government were to eliminate the consumption tax and replace it with an income tax that includes an income tax on interest from savings, what would happen? a. There would be no change in the interest rate or saving. b. The interest rate would decrease and saving would increase. c. The interest rate would increase and saving would decrease. d. None of the above is correct.

Answer 1

Answer:

c. The interest rate would increase and saving would decrease.

Explanation:

As we know, the bank profit would come from the savings of the public as they give them the loan or any other mode to the public by applying the higher interest rate which negatively impacts the saving of the public as they have to pay the tax on the saving.

The interest rate would increase through which the general public would save more but it has a negative impact on public saving.  

Hence, the interest rate would increase which impact the saving amount to be decrease