Self-study
Raising the tax rate on essential goods—a traditional means of increasing government revenues—invariably turns low- and middle-income taxpayers against the government. █████ ██████████ █████████ ████ ████████ ██████ █ ███ ███ ██ █████████ ██ ██████ █████ ████ ██ ███████ ███████ ███████ ███████ ███ █████ ███ █████████ █████ ████ ████ ███ ████ ██████ ██ █ ███████████ ████████ ██ ██████████ ████████ █████ █████████ ████ ███ ███████ ███████████ ███ ████████████ ███ ███ ██████ ██ ████████ ████ ██████
Solution to Problem
The stimulus highlights a problem: the normal way the government raises revenue is to raise taxes on essential goods, but this always turns low- and middle-income taxpayers against the government. Government officials have proposed a solution to this problem. They claim that a new tax on luxury items will substantially increase government revenues while only affecting the high-income purchasers of such items.
Points for Evaluation
Notice that even though the stimulus is framed as providing a solution to a problem, we're not actually interested in whether the government officials' proposed solution actually "solves" the general problem of providing revenue without alienating taxpayers. So even if your first thought was to wonder whether alienating high-income taxpayers would be just as much of a problem as alienating other taxpayers, that's not relevant to this question. We just want to know whether the government officials' specific prediction will be accurate.
Remember that the officials' prediction has two parts: the new tax will provide a "substantial increase" in government revenues, and it will "only affect" the wealthy. To evaluate this prediction's accuracy, it will be useful to know if each of these parts is true. Are enough luxury items purchased, or will the tax on them be high enough, to actually provide a "substantial increase" in government revenue? Even if the wealthy are the ones who directly pay the tax, will there be downstream consequences that will affect middle- and low-income taxpayers? These are the sorts of questions to bear in mind as we go to the answer choices.
11.
The answer to which one ██ ███ █████████ █████████ █████ ██ ████ ████████ ██ ██████████ ███ ████████ ██ ███ ██████████ ████████████ ███████████
a
Will luxury goods ██ █████ ██ █ ██████ ████ ████ ████ ██ █████ █████████ █████ ███ █████████ ██████
This isn't useful. The part of the prediction that (A) relates to is the claim that taxing luxury goods will substantially increase government revenue. But to figure out whether this claim is true or not, we don't necessarily need to know where the rate on luxury goods stands compared to the rate on essential goods. We just need to know whether that rate is high enough on its own, considering the number of luxury goods purchased and their cost, to actually provide a substantial increase in government revenues. (A) doesn't help us figure that out.
b
Will the revenues █████████ ██ ███ ████████ ███ ██ ██████████ ██ █████ ████ ███ █████████ █████ █████████ ██ █████ ██ █████████ ██████
This isn't useful. Remember that none of the claims in the government officials' prediction are strictly comparative. We're not interested per se in how the revenues from the new tax will compare to current revenues from essential goods, though (since the goal is to increase revenue) we can guess they will be higher. We're just interested in whether the revenues from the new tax will be significant enough to count as a "substantial increase" on their own. (B) doesn't help us determine that.
Another way to think about this is that answering this question either "yes" or "no" would still not help us determine whether the revenue increase from the luxury taxes counts as "substantial" or not. Thus, this question doesn't help us evaluate the officials' prediction.
c
Will sales of ███ ██████ █████ ███████ ██ ███ ████████ ███ █████ ██ ███████ █████ ████ ███ ████████ ███ ██ ██████ █████ ███ ████ ███████
This is the most useful question to ask. "At current rates" refers to the volume of luxury item purchases. Will people keep buying yachts, private planes, jewels, and furs just as frequently after the tax is imposed?
This matters because the officials' prediction of a "substantial increase in government revenues" depends on people actually buying these items. A tax on luxury goods only generates revenue when those goods are sold. If wealthy buyers respond to the new tax by simply buying fewer luxury items, the expected revenue could fall far short of what the officials predicted.
This is a real concern, because unlike essential goods (which people have to buy regardless of price), luxury items are, by definition, optional. A buyer who was considering a yacht might decide it's not worth the added cost, or might purchase it in a different country to avoid the tax. If enough buyers react this way, the tax could backfire as a revenue strategy.
So the answer to this question cuts both ways. If sales would continue at current rates, the officials' prediction looks solid. If sales would drop significantly, the prediction starts to fall apart.
d
Will the proposed ███ ██ ██████ █████ ███ ███████ ███ ███ ██████████ ██ ███ ████ ██ ████ ███ █████████████ ██████████
Irrelevant. Nothing in the officials' prediction is about winning support from low- and middle-income taxpayers.
e
Will purchases of ██████ █████ ██ ████████████ ███████ ███ ████ ██ ███ ███████ █████████ ██ ███ ████████ ███ ████ ████ █████████ ██ ██████ █████ ██ ███████ ████████████
Irrelevant. We're not interested in who is paying the taxes, corporations or individuals. We just want to know whether the taxes will provide a "substantial increase" in government revenues, regardless of who exactly pays them.