Jurisdiction B's tax system consists of a 6.5 percent generalsales tax on retail goods and selected services. Over the pastdecade, the average annual volume of sales subject to this tax was$500 million. The jurisdiction needs to increase its tax revenuesby approximately $5 million each year to finance its spendingprograms. The taxing authorities are considering twoalternatives: a 1 percent increase in the sales tax rate or a new 2percent tax on the net income of corporations doing business in thejurisdiction. Based on recent economic data, the annual net incomesubject to the new tax would be $275 million. However, thejurisdiction would have to create a new agency responsible forenforcing and collecting the income tax. The estimated annual costof the agency is $500,000. Jurisdiction B borders four other taxingjurisdictions, all of which have a general sales tax and two ofwhich have a corporate income tax.
1. Based on a static forecast, how much incremental revenuewould Jurisdiction B raise under each alternative?
2. Assume that the taxing authorities in Jurisdiction B want adynamic forecast of the incremental revenues under eachalternative. What additional facts would be important in makingsuch a forecast and why?
Jurisdiction B's tax system consists of a 6.5 percent generalsales tax on retail goods and selected services. Over the pastdecade, the average annual volume of sales subject to this tax was$500 million. The jurisdiction needs to increase its tax revenuesby approximately $5 million each year to finance its spendingprograms. The taxing authorities are considering twoalternatives: a 1 percent increase in the sales tax rate or a new 2percent tax on the net income of corporations doing business in thejurisdiction. Based on recent economic data, the annual net incomesubject to the new tax would be $275 million. However, thejurisdiction would have to create a new agency responsible forenforcing and collecting the income tax. The estimated annual costof the agency is $500,000. Jurisdiction B borders four other taxingjurisdictions, all of which have a general sales tax and two ofwhich have a corporate income tax.
1. Based on a static forecast, how much incremental revenuewould Jurisdiction B raise under each alternative?
2. Assume that the taxing authorities in Jurisdiction B want adynamic forecast of the incremental revenues under eachalternative. What additional facts would be important in makingsuch a forecast and why?
For unlimited access to Homework Help, a Homework+ subscription is required.