Question

Jurisdiction B's tax system consists of a 6.5 percent general sales tax on retail goods and selected services. Over the past decade, the average annual volume of sales subject to this tax was $740 million. The jurisdiction needs to increase its tax revenues by approximately $7.4 million each year to finance its spending programs. The taxing authorities are considering two alternatives al percent increase in the sales tax rate or a new 2 percent tax on the net income of corporations doing business in the jurisdiction Based on recent economic data, the annual net income subject to the new tax would be $395 million. However, the jurisdiction would have to create a new agency responsible for enforcing and collecting the income tax. The estimated annual cost of the agency is $500,000. Jurisdiction B borders four other taxing jurisdictions, all of which have a general sales tax and two of which have a corporate income tax. 1. Based on a static forecast, how much incremental revenue would Jurisdiction Braise under each alternative? (Enter your answers in millions rounded to 1 decimal place.) Incremental Revenue I million million A 1 percent increase in the sales tax A new 2 percent corporate income tax

Answer 1

Given

Volume of sales subject to Tax 740 million

Current sales Tax 6.5 %

Income subject to the new tax if implemented 395 million

Proposed income tax 2 percent

Case 1

One percent increase in sales tax

Volume of sales subject to tax 740 million

Increase in Tax after increase of one percent in tax

Revenue= 740*1/100 = 7.4 million

Case 2

Two percent of new income tax

Increase in revenue after imposing 2 % income tax

=(Income subject to tax * tax percent)-Cost of new agency

=395*2/100-500,000

=7.9 million-500,000

=7.4 million