Question

Consider Figure 6-3. Suppose that the government raises its sales tax from 6 percent to 8 percent. Are the predictions of static analysis and dynamic tax analysis in agreement on the direction of the change of government's tax revenue? Explain briefly.

Short answer

No, the direction of effect on government tax revenue is not based on agreement of change according to static and dynamic tax analysis.

Step-by-step solution

Basic Concept 

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.

Detail 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 $6\%\hspace{0.17em}to8\%$, falls within the range when tax revenue is negatively or inversely related with tax rate and decreases with its raise.

So, the direction of effect on government tax revenue in this range according to static tax analysis implies foregoing increase in tax revenue, which doesn't match with decrease in tax revenue as per dynamic tax analysis.