Suppose that your state raises its sales tax from 5 percent to 6 percent. The state revenue commissioner forecasts a 20 percent increase in sales tax revenue. Is this plausible? Explain.
I would think not, because wouldn't the increase in sales tax shut out some people who do not believe the price for goods is worth the cost of an additional percentage of tax applied to the price.
I agree with thinking.
In addition to people simply lowering their consumption of goods subject to sales taxes, other behavioral responses will occur. People will shift and purchase more nontaxed goods or services. (every state exempts something from their sales tax base). Further, people will cross state lines and purchase goods and services in other states. Finally, the higher the rates, the more noncompliance there likely will be.
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