You just won a contest and have been appointed State of CT Tax Commissioner (you

Question

You just won a contest and have been appointed State of CT Tax Commissioner (you might be asking, why did I enter such a contest? :)). Your primary goal is twofold: raise revenue and make the tax code more efficient. You have to decide which goods to tax, which goods to raise taxes on and which good to lower taxes. Consider your knowledge of elasticity, supply and demand. You need to close a $500 million budget gap for the State.

1. Medical services, electricity and fruits and vegetables are not taxed. Should you start to tax these? Explain your answer.

Explanation / Answer

Yes, I should start to tax these because these goods are having inelastic demand as their elasticity of demand is very less and hence due to change in the price due to increased tax , the change in the demand will be less , thus tax revenue collected will be more as it is applied on large quantity .

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