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

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Quizplus · Accepted Answer

Raising the tax rate from 10% to 12% decreases the tax base from $10 million to $8.5 million, but it's necessary to calculate the actual revenue at both rates to determine which is optimal. At a 10% rate, the revenue is $10 million * 10% = $1 million. At a 12% rate, the revenue is $8.5 million * 12% = $1.02 million. Therefore, raising the tax rate to 12% increases revenue, making option C the correct choice for maximizing tax revenues.

A Local Government Currently Has a Tax Base of $10