March 28, 2017

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suppose that your state raises its sales tax from 5 percent to 6 percent. the state revenue commissioner forecasts a 20 percent increase in sales tax revenue . is this plausible? explain.

  • 12grade economics - ,

    It is more than plausible. It is factual.

    6% is a 20% RELATIVE increase above 5%.

    0.06/0.05 = 1.2

  • 12grade economics - ,

    I beg to differ.

    For a 20% increase in revenue to occur, people would need to purchase the same physical amounts of taxable goods and services they previously did and actually spend 1% more. This is unlikely because 1) with the effective higher prices, and a fixed budget constraint, people will unlikely be able to purchase the same amount of goods and services as before, and 2) people will shift some of their spending to items that did not have an tax increase. (e.g., untaxed items or items from a different state, or internet purchases, etc.)

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