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Elastic Taxes at a Glance

Elastic Taxes at a Glance

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Elastic Taxes at a GlanceIncome taxes are elastic taxes subject to strong market fluctuations. State taxes are made using the income elasticity of demand formula as a guideline to adjust state income taxes every fiscal year. The income elasticity of demand formula is percentage changed in quantity demanded (revenue necessary to maintain the solvency of state government) divided by the percent change income (net income in percentage).  States crunch numbers to determine if it is necessary to lower or raise income taxes. To make the math simpler, state treasury departments average each individual net income and divide them by tax bracket. Then according to a state's income tax policy, state taxes are adjusted to reflect progressive or regressive   state income tax policies. This is how state taxes are raised to deal with the elasticity of everyone's income and the elasticity of the revenue necessary to maintain a balanced budget.
At the state level of government, state taxes are more easily raised than lowered because states lack the ability to print their own currency. In stark contrast to the federal government, deficit spending is not an option to American states. Some states have legal provisions that constitutionally mandate a balanced a balanced budget; while others can run a deficit until the consequences of a fiscal deficit manifest economically or politically. Since both revenue and income are elastic, the government cannot solely rely on income taxes to raise the funds necessary to provide crucial government services. This means that state taxes will also include other elastic taxes like the sales tax. Many governments also include other inelastic taxes as a means of maintaining government solvency.    


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