work decisions. Two possible impacts are known as income effect (taxes reduce the real value of work) and substitution effect (changes in relative value of work in relation to other activities). Income effect Under a consumption tax, an individual's purchasing power decreases, either through increased prices (producers pass the tax along to the consumer) or through decreased wages (taxing authorities directly tax the consumer based on a measurement of their consumption). Assuming the former case, of increased prices, if an individual had monthly expenses of $1,000 and an hourly wage of $10 per hour, they would have to work 100 hours a month to cover the expenditures. However, under a 10% consumption tax and assuming the tax is passed completely on to consumers, the monthly expenditures would be $1,100 meaning the individual would have to work 110 hours to cover them. It is expected that individuals increase their amount of work to compensate for the loss of consumption power as a response to increased taxation. Substitution effect Along with decrease in purchasing power, taxes also decrease the relative value of work in relation to leisure time. If a tax is implemented on consumption, the value of spending an hour at work decreases in relation to different activities because the tax decreases the actual amount of goods and services an individual can purchase for a given level of work. This subsequently increases the relative value of leisure time and decreases amount of working time, effectively working opposite to the income effect. If the consumption tax is to be revenue neutral, the tax rate is likely to be higher in comparison with an income tax, because of the smaller tax base. While the tax base for income tax includes all of personal income, the tax base for consumption tax include only income less savings, thus being necessarily smaller. The higher tax rate might then result in an increased substitution effect. However, the consumption tax is levied also on past savings consumed later in individual's life, e.g. during retirement. The tax on this capital is not expected to distort one's behavior, because there is no legal way to avoid this tax burden. The consumption tax on past savings is thus an example of a lump-sum tax. As a consequence, the consumption tax rate does not have to be that much higher than income tax rate in order to preserve revenue neutrality. One possible