Question

With sin taxes:

a) rates above the t' (revenue max rate) are okay

b)tax avoidance is a desired outcome

c)as the tax rate rises above zero, DWL first falls, then rises

d)he Laffer curve is hiil-shaped

e) all of the above

Answer 1

Sin tax, like other taxes, is distortionary, the only impprtant consideration is that it is applicable on alcohol, tobacco, cigarettes etc that have an inelastic demand and widespread dissapproval by the society. It is essentially an excise tax. It is true that as the tax rate rises, the deadweight loss increaseas, but with continuos increase in taxes, deadweight loss continues to increase as well. In fact tax avoidance for any tax is never a desired outcome. The correct choice is

Option D) Laffer curve is hiil-shaped

Laffer curve states that there is a tax rate which is able to maximizes revenue from tax collection for the government. An increase in tax rate beyond that level will not help in increasing revenue. Essentially it shapes like a bell or a hill.