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 $3.2 billion. If the goal is to maximize tax revenues the tax rate should be

Question

Quizplus · Accepted Answer

To maximize tax revenues, the government should aim to have the highest possible combination of tax rate and tax base. In this scenario, increasing the tax rate to 6 percent leads to a decrease in the tax base to $3.2 billion. This means that even though the tax rate is higher, the overall tax revenues will be lower. Therefore, keeping the tax rate at 5 percent, which currently generates tax revenues of $200 million ($4 billion x 5%) will result in the maximum tax revenues for the government. Hence, the best choice is to keep the tax rate at 5 percent.

A Local Government Currently Has a Tax Base of $4