Question

Read newspaper article “Cook County sales-tax rate falls” in the reading list in week2 note, 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.

Answer 1

Imposition of taxes leads to deadweight loss in the society because it leads to reduction in both producer and consumer surplus and generates revenue for the government. However, the total surplus in the economy falls.The tax revenue increases and decreases with the increase and decrease in tax rates and this can be depicted in the graph below:

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