Question

One outcome of a sales tax is:

A. More expensive goods are taxed at higher rates at the margin.
B. The total amount of taxes collected will increase as the price of the good increases. C. That it allows states that tax to charge a higher tax on goods like cigarettes if the state wants to discourage or decrease behaviors like smoking.
D, that consumers with higher incomes pay higher tax rates.

Answer 1

The correct answer is 'C,' which states that sales taxes, such as cigarette taxes, can be used by states to discourage behaviors like smoking while raising revenue. The effectiveness of the tax depends on how it influences consumer demand.

Step-by-step explanation:

The correct option : c

Sales taxes and taxes on cigarettes are used by governments to raise tax revenue and to discourage certain behaviors, such as smoking. If a higher cigarette tax significantly reduces consumption, then the revenue raised from this tax will be low. Conversely, if the tax does not deter smokers, then it will generate more revenue. Governments must analyze the impact of taxes on consumption patterns when setting tax rates. This extends to firms that must weigh the consequences of changing prices on the demand for their products.

Essentially, the elasticity of demand for the product influences both government tax policy and business pricing strategies. This means that cigarettes would become more expensive, leading to a decrease in demand for cigarettes and hopefully a decrease in smoking rates. By increasing the tax rate on cigarettes, the state can generate more revenue while also discouraging people from buying and consuming cigarettes.