Chapter 2, Problem 1AP

Country M levies a 10 percent excise tax on the retail price of any automobile purchased in the country. This year, the aggregate purchase price subject to tax was $8 million, so current year revenue was $800,000. Country M plans to increase the tax rate next year to 11 percent. Compute next year’s excise tax revenue assuming:

1. a. Next year’s tax base equals the current year base.
2. b. Next year’s tax base increases to $9.3 million.
3. c. Next year’s tax base decreases to $7 million.