-Refer to the above figures. Which panel represents the expected relationship between tax revenue and the sales tax rate if dynamic tax analysis is used?

Question

Quizplus · Accepted Answer

Panel 3 represents the expected relationship between tax revenue and the sales tax rate if dynamic tax analysis is used. This is because dynamic tax analysis takes into account the behavioral changes of taxpayers in response to changes in tax rates. The curve in Panel 3 illustrates the concept of the Laffer Curve, which suggests that there is an optimal tax rate that maximizes revenue. Beyond this optimal point, increases in tax rates lead to a decrease in total tax revenue due to reduced economic activity and tax avoidance.

-Refer to the Above Figures