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If a state increases the state sales tax rate from 7% to 10%, this rate increase...

If a state increases the state sales tax rate from 7% to 10%, this rate increase leads to an increase in tax revenues. Based upon what the Laffer curve tells us, which of the following statements is most correct:

A. The optimal sales tax rate is greater than 10%

B. This state would be on the upward sloping side of the Laffer curve

C. The optimal tax rate is lower than 10%

D. Not enough info

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Answer #1

The laffer curve is represented by an inverted-U shape curve. Firstly as the tax rate increases, the tax revenue increases.And at an optimal level of tax rate , Tax revenue reach at its maximum level and then it starts decreases with each successive tax rate.

It is given that a state increases the state sales tax rate from 7% to 10% , this rate increase leads to an increase in tax revenues. This implies that this state would be on the upward sloping side of the Laffer curve which shows that as tax rate increases , tax revenue increases. The optimal tax rate can be at 10% or at the tax rate greater than 10%. Hence, option(B) is the most correct statement.

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