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.

I would think not, because wouldn't the increase in sales tax shut out some people who do not believe the price for goods is worth the cost of an additional percentage of tax applied to the price.

I agree with your thinking.

In addition to people simply lowering their consumption of goods subject to sales taxes, other behavioral responses will occur. People will shift and purchase more non-taxed goods or services. (every state exempts something from their sales tax base). Further, people will cross state lines and purchase goods and services in other states. Finally, the higher the rates, the more non-compliance there likely will be.

yes

These are all valid reasons why it may not be plausible for the state to expect a 20 percent increase in sales tax revenue when raising the sales tax rate from 5 percent to 6 percent. It is important to take into account the impact of the tax increase on consumer behavior and the potential for decreased consumption, as well as the potential for people to seek alternative options to avoid the higher taxes. While the state may anticipate an increase in revenue based on the higher tax rate, it is important to consider these behavioral responses that could potentially offset or reduce the projected increase in revenue.