Principles of Microeconomics, 7th Edition

Published by South-Western College
ISBN 10: 128516590X
ISBN 13: 978-1-28516-590-5

Chapter 12 - Part IV - The Design of the Tax System - Problems and Applications - Page 255: 7

Answer

Not Plausible. If the state raises its sales tax from 5% to 6%, it is not plausible that sales tax revenue will increase by 20%. The increase in the tax rate is 20%, so the only way tax revenue could increase by 20% would be if total spending didn't fall in response to the tax increase, which is highly unlikely. Instead, the higher tax would raise the price of goods, so people would spend less. Thus, tax revenue might go up because the tax rate is higher, but by less than 20%. There is also a possibility that tax revenues fall as a result of the tax hike.

Work Step by Step

Explanation in answer
Update this answer!

You can help us out by revising, improving and updating this answer.

Update this answer

After you claim an answer you’ll have 24 hours to send in a draft. An editor will review the submission and either publish your submission or provide feedback.