Al believes that SUVs have negative social and environmental effects because of their increased carbon monoxide emissions. He proposes eliminating sales taxes on smaller automobiles in favor of higher sales taxes levied on SUVs. Al performs some calculations and comes to the conclusion that based on the current number of SUVs owned in the U.S., exactly the same amount of total sales tax will be collected under his reformed system. Which of the following concepts explains why Al's idea may not work?
A)The ability to pay principle
B)Horizontal equity
C)Substitution effect
D)Vertical equity
E)None of the choices are correct

Question

Quizplus · Accepted Answer

The substitution effect explains why Al's idea may not work because if the sales tax on SUVs is increased and the sales tax on smaller automobiles is eliminated, consumers may change their buying habits and purchase fewer SUVs and more smaller automobiles, leading to a different amount of total sales tax collected than Al calculated.

Al Believes That SUVs Have Negative Social and Environmental Effects