Question

Individual Retirement Accounts and 401(k) plans make the current U.S. tax system:

A) Less like European tax systems than it otherwise would be.
B) More like a consumption tax than it otherwise would be.
C) More like an income tax than it otherwise would be.
D) More like a payroll tax than it otherwise would be.

Answer 1

IRAs and 401(k) plans make the U.S. tax system more like a consumption tax by deferring taxes on saved income until it is consumed in retirement.Thus the correct option B.

Step-by-step explanation:

Individual Retirement Accounts (IRAs) and 401(k) plans alter the current U.S. tax system in a way that makes it more like a consumption tax than it otherwise would be. These savings vehicles allow the money placed into the accounts to grow tax-deferred until withdrawn, often during retirement. By deferring the taxation of these savings, the system encourages saving over consumption, as the taxes are not applied to the income at the time it is earned but rather when it is consumed, in this case, during retirement. Such tax treatment differs from an income tax system, where taxes are paid on income as it is earned, irrespective of whether it is immediately consumed or saved for future use.