Question

3. "The government cannot assume that as it raises the tax rate it will raise more revenue because the revenue will be affected not only by the direct effect but also by indirect effects as people alter their behavior." Discuss this statement by doing the following. a. One reason for less revenue would be that people evade taxes more. Draw a graph that shows the marginal benefit and marginal cost of tax evasion and use the graph to explain how an increase in the tax rate affects the amount of evasion. b. State and briefly define the direct and 4 indirect effects of an increase in the tax rate o revenues.