A local government currently has a tax base of $10 billion and a tax rate of 10 percent. If the tax rate is increased to 12 percent, the tax base becomes $8.5 billion. If the goal is to maximize tax revenues the tax rate should be

Question

Quizplus · Accepted Answer

Increasing the tax rate to 12% decreases the tax base to $8.5 billion, resulting in lower tax revenues ($1.02 billion) compared to the original 10% rate on a $10 billion base ($1 billion). Therefore, keeping the rate at 10% maximizes revenue.

A Local Government Currently Has a Tax Base of $10