Chapter 6, Problem 15P

To determine

Consider figure 6-3. Suppose that the government raises it sales tax rate from 6% to 8%. Are the predictions of static tax analysis and dynamic tax analysis in agreement on the direction of the change of the government’s tax revenue? Explain briefly.

6-3 Consider the table below when answering the questions that follow. Show your works and explain briefly.

Christino		Jarius		Meg
Income	Taxes Paid	Income	Taxes Paid	Income	Taxes Paid
1000	200	1000	200	1000	200
2000	300	2000	400	2000	500
3000	400	3000	600	3000	800

1. What is Christino’s marginal tax rate?
2. What is Jarius’s marginal tax rate?
3. What is Meg’s marginal tax rate?

Concept introduction:

Static tax analysis: Static tax analysis means an analysis which indicates that when the tax rate is raised by 1 percentage, such an increase will raise the tax revenues by 1 percentage.

Dynamic tax analysis: Dynamic tax analysis means an analysis which indicates that there is only a single tax rate which will maximize the government tax revenues.