A local government currently has a tax base of $4 billion and a tax rate of 5 percent. If the tax rate is increased to 6 percent, the tax base will decrease to $3.5 billion. If the goal is to maximize tax revenues the tax rate should be

Question

Quizplus · Accepted Answer

The tax revenue is maximized when the product of the tax base and the tax rate is maximized. In this case, the tax revenue is 0.05 * 4 = 0.2 billion dollars at a tax rate of 5 percent and a tax base of 4 billion dollars. If the tax rate is increased to 6 percent, the tax base will decrease to 3.5 billion dollars, resulting in a tax revenue of 0.06 * 3.5 = 0.21 billion dollars. Therefore, the tax rate should be raised to 6 percent to maximize tax revenues.

A Local Government Currently Has a Tax Base of $4