【正文】 using an installment contract in the year of purchase.On the other hand, the flat tax provides an incentive for businesses to purchase business property from nonbusiness sources. For example, a business may be able to deduct the cost of land previously used for investment or personal purposes without the seller recognizing any ine. An acceleration strategy would also be effective if the seller is an exempt organization or a retirement plan. Feld(1995) points out that many types of purchases can serve a dual purpose as business inputs and as a store of value for the owners of the business. Deductible business investments that serve this dual purpose enable entrepreneurs to shelter ine with investments by their businesses in order to store value until the individuals need them.EFFECTIVE SOURCEBASED ARBITRAGE STRATEGIESThe flat tax system is susceptible to sourcebased arbitrage strategies because it has several categories of exempt ine. This section describes tax avoidance strategies that attempt to convert taxable business or pensation ine into taxexempt ine.Converting Sales Revenue into Interest IneIn the current system, there is little advantage to converting sales ine into interest ine because both items are subject to the same tax rate. Since interest ine is not subject to taxation in a Hall–Rabushka flat tax system, business taxpayers have an incentive to convert sales revenue into interest ine. One method that can be used to acplish this conversion is for a seller to offer a buyer a reduced sales price in return for a higher interest rate.For example, assume that a business earns net ine before interest and taxes (Xb) on gross sales (S) each year and that the tax rate is t. Then, the after–flat tax earnings of the business are Xa = Xb(1 – t). If Xb = $100,000, S = $900,000, and t = 20 percent, the afterflat tax earnings of the taxpayer are $100,000 (1 – ) = $80,000.Instead of selling its product for S, suppose that the business is able to sell its product to its customers at a discounted sales price equal to its normal expenses (S – Xb) plus additional transaction costs (T) due in one year and bearing interest at the annual rate r. Since the sales price has been reduced to (S – Xb + T ), the taxpayer will not owe any flat taxes. Moreover, since the sales price is not collected for one year, the taxpayer will be forced to finance its expenses for the next year at its borrowing rate, k. If the business is able to sell its product using this type of transaction, then its after–flat tax earnings under the new arrangement, Xa N, will be①XaN = (S – Xb + T )(1 + r) – (S –Xb + T)(1 + k) and the alternative sales arrangement will be profitable as long as②XaN / (1 + dB) Xb(1 – t ) where dB = Xb (1 – t ) / (S –Xb) is the business’ discount rate calculated in terms of the business’ opportunity cost. Solving equation 2 for r provides us with the interest rates that are acceptable to the business:③r k + Xb (1 – t)(1 + dB) / (S –Xb + T ). Using the amounts in the example and assuming that k = 8 percent and T = $5,000, the business’ discount rate (dB) is $80,000 / $800,000 = 10 percent and the minimum interest rate that must be charged by the business to earn at least Xb(1 – t ) must exceed 8 percent + $80,000() / $805,000 = .Once again, the success of this tax strategy depends on the type of customer that purchases the product or service. Business customers will be unlikely to enter into the alternative contract because the tax benefit derived from substituting interest ine for sales ine (Xbt ) is exactly offset by the business customer’s loss of the tax deduction on the price reduction. By contrast, if the seller’s product is purchased by an individual consumer, then the purchase price of the product does not contain any current or potential tax consequences for the The consumer will be willing to purchase a product under the new sales arrangement as long as the present value of the total amount that will be paid for the product does not exceed the original purchase price of the product:④(S – Xb + T ) / (1 + dC) S where dC is the discount rate for the consumer. Solving for r provides us with the interest rates that are acceptable to the consumer:⑤r S(1 + dC) / (S – Xb + T ) – 1. Substituting equation 5 into equation 2 and solving for dC provides us with the consumer discount rates that are necessary for the business taxpayer to earn positive profits using the alternative sales arrangement:⑥dC S –1[(S – Xb + T)(1 + k)+ Xb(1 – t)(1 + dB)] – 1. Continuing with our example, when Xb = $100,000, S = $900,000, T = $5,000, t = 20 percent, k = 8 percent, and dB = 10 percent, equation 6 indicates that the business will be willing to sell the product and the consumer will be willing to purchase the product under the alternative arrangement as long as the consumer’s discount rate (dC) exceeds [$805,000() + $80,000()] / $900,000 – 1 = percent. For example, if the consumer’s discount rate equals the business’s borrowing rate (., dC = k = 8 percent), equation 5 shows that the business will be able to charge an interest rate of $900,000() / $805,000 – 1 = percent and equation 2 shows that the business will be able to earn profits of $805,000(–) / – $80,000 = $13,307 above the $80,000 earned in the absence of the alternative sales arrangement.This analysis assumes that the entire tax benefit will accrue to the business. In a petitive environment, peting businesses will attempt to increase their sales by offering interest rates that allow customers to share in the tax savings. Consequently, it is possible that the long run benefits of the new sales arrangement will be shared by both the seller and the buyer.Converting Sales of Business Property into Sales of PersonalUse PropertyIn the current tax system, taxpayers devote much time and energy in efforts to convert ordinary ine into preferentially taxed capital gains. In a fla