Question

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. Which of the following are plausible as a result of this increase in the sales tax. Is this plausible? Explain.

Answer 1

It is plausible that increasing the sales tax rate could lead to increased revenue if consumer spending remains steady or if the tax applies to goods with inelastic demand. The actual impact depends on how the tax change affects consumer behavior and economic conditions.

Step-by-step explanation:

The question of whether it is plausible that a rise in the sales tax rate from 5 percent to 6 percent could lead to a 20 percent increase in sales tax revenue involves understanding the relationship between tax rates and tax revenue. State and local governments rely on various sources of revenue, including sales taxes, to fund operations and services. An increase in the sales tax rate might bring in more revenue if consumption does not decrease significantly as a result of the tax hike. However, if the higher rate negatively affects consumer spending, it could potentially lead to a smaller increase in revenue than projected or even a decrease if the tax hike significantly deters consumption.

Sales taxes are generally a percentage of the retail sale price of goods and some services, and as such, they are sensitive to consumer behavior and economic conditions. Sales taxes can constitute a significant portion of a state's revenue. If the increase in the sales tax does not lead to a proportionate decline in purchases, or if the tax is applied to inelastic goods where consumers do not significantly change their buying habits in response to price changes, a significant increase in sales tax revenue could indeed be plausible.

Answer 2

Answer: No it's not plausible.

Step-by-step explanation:

Here is the complete question:

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.

From the question, we are told that the state increases its sales tax from 5 percent to 6 percent and the state revenue commissioner predicted that a 20 percent increase in the sales tax revenue due to the increase in sales tax.

This is not plausible, when the sales tax increases from from 5 percent to 6 percent, this will lead to an increase in the prices of the goods. According to the law of demand, the higher the price of goods and services, the lower will be the demand for the good. So, in this case, due to the increase in sales tax, it may prompt the consumers to reduce their spending.

Therefore, a 20 percent increase in the sales tax revenue is not plausible. Even if there will be an increase in the sales tax revenue, it won't be up to 20 percent.