Question

Read newspaper article “Cook County sales-tax rate falls” and answer the following questions

1) In 2008, Cook County Board President Todd Stroger passed the sales tax increase to 10.25 percent, a sales tax rate higher than any other large city in America, to increase the tax revenue to support the health care system in Cook County. However, the revenue couldn’t make any payment to the health system. Explain the impacts of tax increase on tax revenue using demand and supply curve.

2) Since January 2013, most of sales tax moved back to under 10%, predict the impacts of the lower tax on the tax revenue using demand and supply curve.

Article:

Yes, as a matter of fact Chicago is the Second City.

With the dawn of a new year, a lower sales tax rate in the region means Chicago no longer has the highest combined sales tax rate of any large city in the nation. Now it’s in second place.

As of Jan. 1, Cook County’s sales tax fell a quarter of a cent. In Chicago, that means the combined sales tax — meaning state, county, city and mass transit sales taxes — tacked on to most retail purchases, except groceries, dropped from 9.50 percent to 9.25 percent. That’s just below first-place Phoenix, where the rate is 9.3 percent, but above Los Angeles and New York, where rates are 9 percent and 8.875 percent, respectively, according to Chicago-based YETTER, a sales-tax consulting firm

Likewise, taxes on a restaurant tab will fall a quarter of a cent but will vary depending on where you dine across the county. Restaurants inside a special taxing district, which includes downtown Chicago, will see taxes fall from 10.75 percent to 10.5 percent, for example.

The rollback wipes the Stroger sales tax increase off the books. Back in 2008, then-Cook County Board President Todd Stroger championed — and won the votes from a majority of county commissioners for — a penny-on-the-dollar sales tax increase that pushed Chicago’s overall sales tax to 10.25 percent, a sales tax rate higher than any other large city in America.

Stroger and others argued that the increase was needed to plug a budget hole and keep the doors open at the county’s public health system.

Laurence Msall, president of the tax watchdog Civic Federation, said those revenues never went to pay for services provided by the county’s health system, which serves the poor and uninsured.

“It disproportionately went to other areas of the government,” Msall said. “In many cases, the money went for retroactive pay raises outside the county hospital system.”

For Stroger, who defended the sales tax increase, it was too late. Voters sent him packing. Toni Preckwinkle easily won the board presidency.

She quickly struck a deal with commissioners to slash the remaining half a penny: a quarter of a cent on Jan. 1, 2012, and the final quarter of a cent on the first day of 2013.

So now the “Stroger sales tax” — as Preckwinkle likes to call it — is gone for good.

Stroger couldn’t be reached for comment. In a statement, Preckwinkle said: “We made the choice to cut taxes on everyday items a majority of residents need. This was a vow I made to working families who saw the price of toothpaste . . . and baby formula rise. It’s a pledge I made to businesses.”

Suburban county commissioners said that tax increase hurt businesses on the edge of the county.

Liz Gorman, a Republican, said the rollback levels the playing field for Cook County businesses. “It gives the businesses along the borders of Cook County a better opportunity to compete with businesses in the collar counties,” she said in a statement.

The rollback means county government won’t see an estimated $86 million in revenues this year. But the Preckwinkle administration expects tax revenues to be higher than expected in 2013.

“We have already seen an improvement in sales tax activity and were able to revise our original projection for sales tax revenue for 2013 as a result, by $10 million. We will continue to monitor this trend for further improvements,” county Budget Director Andrea Gibson said in a statement.

DePaul University Professor Joe Schwieterman said, “The sales tax rollback is only part of the equation.”

There’s a rebound effect in the general economy,” he said, noting he doesn’t want to dismiss Preckwinkle’s push to slash the sales tax, which he called the “most business-friendly” and consumer-friendly move in some time.

“I have no doubt that the county rollback has had big effects, but we’re still a high sales tax region,” he said.

Answer 1

Solution 1

When taxes were increased to fund healthcare expenses what was observed is that the tax revenues increased albeit the funds were disproportionately used for government expenditure in discretionary items.

The increase in taxcaused the aggregate demand to fall and hence consumption was slightly lower. However higher tax outgo compensated for overall rise in revenue.

Solution 2

The lowering of taxes helped people buy more and and as results aggregate demand lifted up which caused increase in prices of goods and services. This led to higher tax revenue despite decrease in taxes.