Question

Suppose that a state government implements a tax on​ mechanics' labor time at all state auto repair shops in order to enhance its tax revenues. One year later the government is disappointed to find that not only is the amount of tax collected​ small, but that​ in-state auto repair work significantly declined. This state government apparently utilized which type of tax​ analysis?

A) Linear projection tax analysis.
B) Speculative tax analysis.
C) Static tax analysis.
D) Dynamic tax analysis.

Answer 1

Answer:

The answer is: C) Static tax analysis

Explanation:

Static tax analysis assumes incorrectly that no changes will occur in economic behavior as a result of changes in tax policy. For instance, usually when taxes are lowered, the total government revenue rises. If we use static tax analysis our calculations would be that if taxes are lower, then government income will be lower.

That is usually wrong, because any change in tax rates will change the behavior of consumers, corporations and investors. Those changes will be reflected in economic performance and government revenue. This last approach is known as the dynamic tax analysis.