Question

Consider Figure 6-3. Suppose that the government raises its sales tax from 4 percent to 6 percent. Does the direction of the effect on government's tax revenue indicated by the figure's dynamic tax analysis accord with the prediction that would have been forthcoming from static tax analysis? Explain briefly.

Short answer

Yes, the direction of effect on government tax revenue is in accord with prediction of static tax analysis

Step-by-step solution

Basic Concepts 

Static Tax Analysis : mentions that tax revenue increases infinitely due to rise in tax rate, as the tax base (taxable amount) remains unchanged.

Dynamic Tax Analysis : states that tax revenue increases till a certain optimum point due to tax rate increase and decreases afterwards, due to initial raise and gradual fall in tax base.

Explanation 

The diagram shows the tax rate increase from $0\%$to $6\%$increases the tax revenue collected. At further increase beyond $6\%$, the tax rate rise causes fall in tax revenue.

However, range of tax rate increase given, from $4\%\hspace{0.17em}to6\%$falls within the range when tax revenue is positively or directly related with tax rate and increases with its raise.

So, the direction of effect on government tax revenue in this range according to prediction of static tax analysis.