Economics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 7

In an election debate, two candidates for governor are debating about whether to raise the general sales tax from 5 to 7 percent. One argues that this would increase tax revenues, enabling the state to maintain essential services. The other argues that the tax would hurt retailers and consumers, and would actually slow down the economy so much that it would decrease tax revenues too. Restate these candidates' positions in economic terminology, and explain what assumptions they must be making in order to justify their different positions, in terms of price and quantity effects.