Jurisdiction F levies a 10% excise tax on the purchase of golf carts. The annual revenue from this tax averages $800,000 (10% * $8 million average annual golf cart purchases). Jurisdiction F is considering raising the tax rate to 12%. Which of the following statements is true?
A) The rate increase will increase revenue by $160,000.
B) Based on a dynamic forecast, the rate increase will increase revenue by $160,000.
C) Based on a static forecast, the rate increase will increase revenue by $160,000.
D) None of these choices are true.

Question

Quizplus · Accepted Answer

The static forecast assumes that the increase in tax rate will not affect the quantity demanded of golf carts. Therefore, the additional revenue generated by the 2% increase in tax rate would be 2%* $8 million = $160,000. A dynamic forecast, on the other hand, would account for the possible decrease in demand for golf carts as the tax rate increases. However, since the question only asks for a static forecast, the answer is C. A is incorrect because it does not take into account the percentage increase in tax rate. B is incorrect because it mentions a dynamic forecast, which is not requested in the question. D is incorrect because the statement in option C is, in fact, true based on a static forecast.

Jurisdiction F Levies a 10% Excise Tax on the Purchase