Question

The sales tax rate applied to all purchases within a state was 0.04 (4 percent) throughout 2016 but increased to 0.05 (5 percent) during all of 2017. The state government collected all taxes due, but its tax revenues were equal to $40 million each year. What happened to the sales tax base between 2016 and 2017? What could account for this result?

Short answer

Amount of taxable sales in year 2016 & 2017 is $100 Billions & $80 Billions and change in sales tax but not in revenue shows decline in sales.

Step-by-step solution

Step 1. Meaning

Sales Tax Rate:When a good or service is purchased by a customer at retail, so the percentage of some amount added to that product or service is called Sales Tax.

Tax Revenue:It is the amount of income that is collected by governments via taxation.

Step 2. Explanation 

Sale tax rate in all purchases within the state was 4% in 2016 & 5% in 2017.

Tax revenue for both the years was 40 million.

Formula Used:

Total Taxable Amount = 100 * Sales Tax Amount / Sales Tax Rate

For 2016,

Total Taxable Amount = 100 * Sales Tax Amount / Sales Tax Rate

By putting all values

= 100 * 40(millions) / 4%

= 2500 * 40(millions)

= $100 billion

For 2017,

Total Taxable Amount = 100 * Sales Tax Amount / Sales Tax Rate

By putting all values

= 100 * 40(millions) / 5%

= 2000 * 40(millions)

= $80 billion

Step 3. Explanation 

Decline in taxable sales

= sales in previous year - sales in current year

= $100 - $80

= $20 billion.

Change in sales tax but not in revenue shows decline in sales.