Question

This year, State A raised revenues by increasing its general sales tax rate from 5 percent to 6 percent. Because of the increase, the volume of taxable sales declined from $800 million to $710 million. In contrast, State Z raised revenues from its 5 percent sales tax by expanding the tax base to include certain retail services. The volume of services subject to tax was $50 million. (Enter your answers in dollars not in millions of dollars.)

a. Compute the additional revenue raised by State A .

b. Compute the additional revenue raised by State Z.

Answer 1

Answer:

a. $2,600,000

b. $2,500,000

Explanation:

The computation is shown below:

a. The additional revenue raised by State A is

= Revenue after applying the tax rate - initial revenue after applying the tax rate

where,

Initial revenue after applying the tax rate = $800 million × 5% = $40 million

And, the Revenue increased after applying the tax rate is

=  $710 million × 6%

= $42.6 million

So, the additional revenue is

= $42.6 million - $40 million

= $2,600,000

b. The additional revenue raised by State Z is

= Sales tax rate × service volume

= 5% × $50 million

= $2,500,000