Reduction of an excise tax actually produce more tax revenue

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Reference no: EM13695077

cise Taxes and Tax Revenue The government pays attention to elasticity of demand when it selects goods and services on which to levy excise taxes (taxes levied on the production of a product or on the quantity for the product purchased). If a $1 tax is levied n a product and 10,000 units are sold, tax revenue will be $10,000 $1 X 10,000 units sold).If the government raises the tax to $1.50, but the higher prices that results reduces sales (quantity demanded) to 4000 because demand is elastic, tax revenue will decline to $6000 $1.50 X 4000 units sold). So a higher tax on a product that has an elastic demand will b ring in less tax revenue. In contrast, if demand is inelastic, the tax increase from $1 to $1.50 will boost tax revenue. For example, if sales fall from 10,000 to 9000, tax revenue will rise from $10,000 to $13,500 $1.50 X 9000 units). Little wonder that legislatures tend to seek out products such as liquor, gasoline, cigarettes, and phone services when levying and rising taxes. Those taxes yield high tax revenues.

Question: Under what circumstance might a reduction of an excise tax actually produce more tax revenue?

Reference no: EM13695077

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