The answer to this has to do with the concept of price elasticity of demand. Basically, if the tax is lowered, people might increase their buying so much that the tax revenues actually go up.
The law of demand tells us that, when prices go down, people buy more of a given good or service. We do not know, however, exactly how much more people will buy for any given drop in the price. This...
The answer to this has to do with the concept of price elasticity of demand. Basically, if the tax is lowered, people might increase their buying so much that the tax revenues actually go up.
The law of demand tells us that, when prices go down, people buy more of a given good or service. We do not know, however, exactly how much more people will buy for any given drop in the price. This is where price elasticity of demand comes into play. If demand for goods is very elastic, a small drop in price will cause people to buy a much larger quantity of goods and services.
If demand for goods and services is very elastic in Florida, this decrease in sales tax could actually result in higher revenues. When sales tax decreases, prices, in effect, decrease as well. If demand is elastic enough, people will buy so much more that total sales tax revenues rise.
Let us look at an example of how this is possible:
Let us say that people buy $1,000 worth of goods and services from a given store each day. With the sales tax at 6%, the government gets $60 in tax revenue. Now the sales tax drops to 5.5%. If people now buy $1300 worth of goods and services each day, the government takes in $71.50 in sales tax. Thus, if demand is elastic enough, dropping the sales tax can increase revenue. However, demand may not be sufficiently elastic so this is not guaranteed to work.
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