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What Does Inelastic Mean?

What Does Inelastic Mean?

Inelastic means that there are not many factors that can influence an outcome. For example, inelastic demand means that goods and services will not be impacted directly by a citizen’s salary changes. The purchase of items like eggs and bread, are income inelastic. 
That principle can be applied to many economical scenarios, including state and local taxes. For example, local taxes that are applied to the sale of items, or local sales taxes, can sometimes effect the sale of that good. If produce suddenly incurs local taxes, consumers may not purchase as much produce as they did previous to the local taxes on produce. However, items like produce are likely to be elastic as they are considered a necessary part of the human diet.
If however, local taxes were suddenly imposed on entertainment venue, consumers may forgo their night out. If a family generally enjoys a movie night once a week, they have probably allowed for that entertainment in their budget. If local taxes were then applied to each movie ticket, that family’s budget may not allow for that change in price. In addition, if any family member began to experience a decrease in salary, they may no longer spend the money, once local taxes have been applied to their entertainment. Inelastic items tend to be those that are necessary for human survival, such as basic food and shelter. 
Although basic shelter is inelastic, more expensive homes tend to be elastic and sales of those homes are based on the overall financial health of the nation. The recent financial crisis spotlighted the influence of the economy over the sale of homes. Before the economy crashed, even basic shelter incurred larger sales prices as homes became very valuable. However, more people are currently renting, or have moved to cheaper homes. Basic shelter is inelastic but more expensive shelter is very elastic.
The sale of inelastic items is not as based on supply and demand as elastic items are. No matter how many shelters there are, homes will always be inelastic. Yet, more expensive shelter is very elastic and dependent on supply and demand, in addition to the state of the economy. Basic shelter is more abundant due to the higher demand of such shelter which makes those homes inelastic. There will always be a need for inexpensive housing. Expensive homes are less abundant because their is not as high a demand for such homes. The demand for expensive housing changes in direct proportion to the state of the economy and is therefore very elastic.

What Does Non-cyclical Mean?

What Does Non-cyclical Mean?

Non-cyclical is a term that can be applied throughout the economic sector. For example, non-cyclical stocks are stocks that perform absent of factors based on the state of the current economy. In other words, non-cyclical stocks are those that perform well even in a bad economy. 
Non-cyclical taxes would be those that are imposed regardless of other factors. In addition, non-cyclical taxes are those that are not based on any cycle, or those that are not cyclical in nature. The need for tax revenue is not dependent on when voting takes place. Just because voting is cyclical, does not mean that the need for tax revenue is.
Cyclical demand is the demand of an item, goods, or services in a cyclical pattern. For example, the demand for sunscreen tends to be cyclical as it is often in demand in the summer months. However cyclical data is not always appropriate. For example, sunscreen is usually required year round, regardless of the temperature. Although cyclical data would suggest that sunscreen is only necessary in the summer months, the reality is otherwise. Tax revenue is also not in cyclical demand.
Like sunscreen, their are financial principles that should always apply realistically, but intervening factors often change the cyclical demand of such principles.  For example, school budgets sometimes appear to be in cyclical demand based on the voter practice associated with school budgets. However, the reality is that school budgets are always necessary in order for schools to run smoothly and efficiently. For the taxpayer, cyclical data suggests that an increase in the school budget is necessary on a cyclical basis. 
Realistically, school budget increases are necessary on a non-cyclical basis. School budget needs change as a result of many factors, the least of which is when taxpayers vote based on their local jurisdictions laws.  However, there is a cyclical demand for an increase in a school budget which is simply based on inflation. In essence, there are many intervening factors that effect economic needs, the manner in which taxes are assigned and the manner in which tax revenue is spent. 
For taxpayers, these issues seem to occur according to cyclical data. The reality is that governmental activities, such as voting, do happen in a cyclical nature and therefore, these issues come up in that manner.
Non-cyclical economics simply mean that things do not always occur at a prescribed time. In fact, jurisdictions sometimes call for an emergency vote on some issues. In addition, jurisdictions can sometimes overturn voter’s decision in specific circumstances. 
For example, although a school budget vote may be cyclical, students needs are not. A jurisdiction may overturn the voters decisions to vote a school budget down. Cyclical data sometimes makes it appear that issues of a cyclical nature, but reality suggests otherwise.

A Quick Guide to Government Revenue Streams

A Quick Guide to Government Revenue Streams Local governments and state governments are legally allowed to make their own tax laws. Each individual local and state government has the ability to impose taxes at their discretion. However, local governments must adhere to their state governments tax laws. For example, a local government cannot impose a sales tax that is not allowed according to their state governments tax laws. In addition, both state governments and local governments are under the federal tax jurisdiction. 

While each local jurisdiction has the right to make their own tax laws, they cannot violate Federal tax laws. Each tax jurisdiction is also able to make determinations as to how tax dollars are spent, as long as those monies are spent for the overall good of citizens.

No local government can enact a tax that is deemed to be illegal according to the Federal or State government.  If for example, a local government wanted to spend tax revenue in order to take part in activity that is deemed illegal by a governing body, they could not do so. In addition, they could not impose taxes that were deemed unfair, or would prevent business in their area. The Commerce Clause allows congress to overturn such tax laws. If for example, a state government tried to enact highway tolls that only applied to certain types of businesses, the Commerce Clause would disallow such a tax based on the tax being unfair.  
On a local level, citizens sometimes have a say in how their local tax revenue is spent. School budgets are a good example of a taxpayers ability to influence how tax dollars are spent. If a school budget was proposed that raise property taxes, voters could vote no and disallow that increase in taxes for that purpose. 
Property tax assessments can also be challenged in court because each taxpayer is entitled to due process. However, local governments and state governments do have the ability to make other determinations about how tax revenue is spent. For example, the governor may deny state aid to local governments that do not adhere to state policies.
Each jurisdiction has some power for determining the types of taxes imposed on citizens. In addition, the manner in which tax dollars are spent, can also be determined by each jurisdiction as long as they adhere to the Federal governments tax laws and theCommerce Clause, among others.

Fair Apportionment at a Glance

Fair Apportionment at a GlanceFair Apportionment is a factor in tax law which is described in the Commerce Clause. The Commerce Clause gives the federal government the power to intercede in tax issues on an intrastate and interstate level. In the courts decision in Complete Auto Transit v. Brady, it was determined that taxation must be equally divided between states that are involved in interstate commerce. However, the ruling has caused great controversy. Many corporations believe that interstate commerce is unfairly taxed based on that division of taxation.

Businesses that have a presence in more than one state, are allowed to apportion their taxation across all states in which they have a legitimate presence. Fair apportionment allows businesses to base their taxes on income as a percentage in each state. In addition to being affirmed in the Commerce Clause, fair apportionment was also found in

Uniform Division of Income for Tax Purposes Act in 1957. While the manner in which divided taxation percentages are reached has changed, the idea remains the same. The Commerce Clause states that taxation must be fair while being equally divided, according to income, by states in which a company conducts business.

Many factors, including percentage of sales in each state, as well as amount of company locations within a state, are used to determine fair apportionment of taxes. Some states utilize several factors for determining a fair apportionment of taxes, while other states utilize a single factor. In either case, the factors utilized, are able to be changed or overturned by theFederal courts, according the Commerce Clause.

For example, a tax law that seems to implement unfair taxation on a company, by a state in which it does business, can be overturned by the Federal government if the taxation does not comply with all applicable laws. Generally, businesses receive better tax rates, due to various tax breaks,  in states where their headquarters are located.

Sales are a major determination in fair apportionment of taxes. However, the source of the merchandise is also a factor utilized in the fair apportionment of taxation formula. Each state makes its own determinations for fair apportionment, utilizing differing factors, but each fair appointment must adhere to the Commerce Clause.

No state may impose taxes that undermine fair business, or discourage business in that state or in other states. If a business receives better treatment in a specific state, they may be more likely to conduct their business in that state. Those types of situations go against the Commerce Clause.

Understanding the Factors of Income Elasticity

Understanding the Factors of Income Elasticity

Income taxes, and other forms of state taxes and federal taxes, are based on many factors. Personal income taxes are based on an individuals total income including capital gains and other sources of income, after any allowable deductions have reduced an individuals total income. State taxes may allow differing deductions from allowable federal income tax deductions. In any case, an individuals federal income tax  and state taxes responsibility is often reduced due to allowable deductions.  
Income elasticity is also based on several factors and income tax revenue can foreshadow the economies effect on those determinations. The basic idea is that an individuals consumption, or purchases of consumer goods, changes as their salary changes. Therefore, both income taxes and income elasticity are  based on an individuals income or disposable income.
Many goods and services are dependent on consumers disposable income. Items like gasoline, which is necessary for most people to get to work, are still income elastic. For example, most consumers will find it necessary to purchase gasoline to get to work or run errands. However, when income is lowered, gasoline consumption decreases especially if state taxes on that item increase. Individuals may forgo vacations, or carpool to work. There are other items that are not as income elastic.
For example, purchases of  bread, milk, and other basic supplies, remains fairly constant. Whereas, gourmet or organic versions of the same food, are income elastic and demand for those items increases as the economy gets better. Many items can be considered income elastic based on the state of the economy, as well as each individuals financial health. Individuals may be more likely to purchase certain items, as their salary increase, making those items income elastic. However, some items are more likely to be purchases as the overall health of the economy increases. 
The impact of the economy on income elastic items can be evident by examining the governments revenue from income taxes or state taxes. As income taxes increase as a result of higher salaries, so to will the sale income elastic items.
There are many goods and services that are income elastic. When salaries are lower, people may wash their own car. When salaries increase, individuals may be more likely to take their car to a car wash. Difficult economic times often make these distinctions more obvious. 
Things that were not believed to be income elastic, may be found to be very reliant on the overall state of the economy. Items once thought to be a necessity may actually be income elastic when individuals experience a decrease in salary. Even basic items, such as bread, may no longer be thought of as a necessity when a persons salary is decreased.

What You Didn’t Know About Countercyclical Taxes

What You Didn't Know About Countercyclical Taxes

Cyclical factors are those that have a cycle associated with them. For example, property taxes are often cyclical and are paid on a quarterly basis. In addition, increases in property taxes are often on a cyclical basis as most states mandate new tax assessments in a certain time frame.  Non-cyclical factors are those that have no cycle. 
For example, sales taxes are not subject to a cycle and are simply imposed when a taxpayer makes a purchase. Countercyclical factors are those that work against those of a cyclical nature. For example, a countercyclical  economic factor is one that works in opposition of the economy. For example, a tax imposed during rough economic times would be one that boosts the economy. Conversely, a tax that hurts the economy during good financial times would also be countercyclical. A countercyclical factor is one that opposes current circumstances.
Progressive taxes are said to countercyclical based on the principles of inflation. For example, an individual that experiences an increase in income, would pay higher taxes based on a percentage of their salary. In contrast, an individual that experiences a decrease in salary and is subject to a regressive tax, would also be experiencing a countercyclical tax. Inflation can have a large impact on those economic principles. 
Inflation itself is countercyclical. Inflation means that taxpayers experience increased prices for everything, including taxes. Those that have an increase in salary due to inflation, currently pay higher income taxes which negate the benefit they experienced in their salary due to inflation. Cost of living salary increases are simply a result of inflation. Those taxpayers that receive the benefit of an increase in salary due to inflation, often experience many rebound effects from that increase. Although the cost of living has obviously increased, so to have taxes and other fees. That increase in taxes may be a direct result of the cost of living benefit included in that taxpayers salary.
Inflation has a large impact on all other economic factors that effect taxpayers. However, the opposite is also true. There are many economic factors that influence inflation. Sometimes it is difficult to ascertain which economic factor was a result and which was a cause. The non-cyclical nature of the economy makes it difficult to predict inflation or an economy that is on the down swing.

What You Didn’t Know About Cyclical Taxes

What You Didn't Know About Cyclical Taxes

Cyclical taxes are paid throughout the tax year, rather than the years end. For example, most states impose property taxes on a cyclical schedule. For example, some property taxes may be due every three months, so that property owners contribute to their taxes every quarter. 
Income taxes are also cyclical taxes as employees pay those taxes every pay period, regardless of how often they get paid. So each employees tax cycle will differ based on their pay schedule. Income tax estimates are divided based on that pay schedule and an the estimated tax burden is paid each pay cycle. Employers also contribute to payroll taxes on a cyclical schedule.
The government has claimed that a cyclical cycle for taxes can help taxpayers to avoid being unable to meet their tax burden at the end of the year. For example, an employee that makes forty thousand dollars, will have an income tax responsibility estimate determined by their employer. That estimate will then be divided by the number or pay periods and payments will be made towards that tax burden on a cyclical schedule. 
There is of course, no guarantee that the estimate will be correct. After an employee files their income taxes, they may find that they are due a refund of that they owe additional monies to cover their income tax burden. This is in fact, one of the reasons that many taxpayers are against the manner in which taxes are collected. While the government has tax payments in advance, they are able to use that money any way they see fit, including collecting interest on that money.
In the hands of the taxpayer, cyclical taxes could also collect interest, which could theoretically be use to pay for the added tax burden. In addition, taxpayers that are owed a refund by the government do not get interest on the money that the government held. In other words, tax refunds do not include any interest on over payments. If however, taxpayers can not immediately cover any additional necessary tax payments, they incur late fees, penalties and interest payments in addition to the taxes owed.
While many taxpayers are against cyclical taxes because of the possible loss of interest, payroll taxes are required to be taken out of paychecks throughout the year. Even the savvy taxpayer is unable to utilize monies that will later pay taxes, in order to invest or make interest. The law requires that employers take out these taxes throughout the year. Most taxes are in fact collected this way.

What You Must Know About Economic Classifications

What You Must Know About Economic Classifications

Trends in tax rates are influenced by both the needs of the government and the needs of the commercial market. Because taxes are so heavily influenced by the economy, economic classifications are used to determine fiscal policies according to political and economic influences. These classifications are not always clear cut and often have both economic and political influences inherent to trends in state taxation.

TAXES AND TAX POLICIES INFLUENCED BY POLITICS

Progressive Taxes

The progressive tax is a politically oriented tax policy that attempts to make the income tax fairer by increasing the percentage of earned and unearned income withheld as the total sum of earned and unearned income increase. In the plainest of language, this simply means that the richest members of society pay the highest income taxes and the poorest members of society pay the least income taxes. This type of taxation is in line with the equal protection clause of the 14th amendment of the Constitution because everyone’s tax burden is directly proportionate to their respective income. This type of income tax policy is based on the three economic classifications of socioeconomic groups, the working class, the middle class, and the rich. These three economic classifications are distinguished by a legally mandated tax bracket. 
The percentage of income tax withheld from someone’s income depends on the tax bracket to which an individual or a married couple belongs. Corporations are also required to pay state income taxes and are similarly placed on a three tier tax bracket system. The main political reason a state legislature may implement the progressive income tax is that the progressive tax distributes the tax burden such that an economic recession would reduce the political upheaval that usually accompanies recessional periods. The progressive tax is also economically prudent because adequate revenue from the rich can allow the government to intervene in the event of economic emergency.

Regressive Taxes

Regressive taxes are the opposite of the progressive tax. They use the same system of determining class by income tax bracket; however, place the bulk of the tax burden on the middle class and poor. The regressive tax is justified because the rich then have the capital to expand the economy. Vicariously, tax cuts for the rich increased the wealth of all because the rich can generate wealth in the private sector through job creation. 
Lower taxes on the rich also stimulate the flow of credit that is vital to establishment of new businesses. Regressive taxes create a promising but less forgiving economic market. Regressive taxes are an example of how the income tax may apply to the doctrine of laissez-faire economics. The regressive tax stems from the political belief that the wealth of nations is produced by the fundamental innovations of investment capital and industrial capital.

TAXES AND TAX POLICIES INFLUENCED BY ECONOMICS

Income Tax Elasticity
What is meant by “elasticity” in application to taxation is heavily influenced by the concept of “elasticity” in economics. Elasticity in economics refers to the susceptibility of supply and demand to the market fluctuations of the business cycle. State governments understand that both the budgetary needs of government and the income people generate personally are inherently subject to market influences. This is the primary reason why the budget is argued annually in state capitals across America. Tax policy is based on economic conditions as determined by the economic formula of Income demand of elasticity. States do not enjoy the luxury of deficit spending as the federal government does. 
In fact, many states are constitutionally required to maintain a balanced budget. Larger states, like New York, New Jersey, and California can run deficits but they almost always result in political upheaval when taxes are raised and services are cut in the event of economic recession. Income taxes are an elastic tax and as such are adjusted according to progressiveness or regressiveness to politically distribute the tax burden because the reality is that some people can handle more taxes than others. Also, given that income taxes are elastic, states impose sales taxes on other elastic commodities to boost revenue to ensure state government solvency.

Inelasticity of Revenue
Not all taxes are elastic. Some state’s impose sales taxes are tacked onto inelastic commodities like food. The inelasticity of a given commodity expresses the fact that slight changes in the price of a product does not change consumer behavior for better or for worse. Consumption of a inelastic commodity is a relatively stable and rarely susceptible to market pressures. Sometimes inelastic sales taxes are imposed on a commodity like alcohol, tobacco, or sugary beverages for political reasons. 
Lawmakers choose to raise taxes on such inelastic commodities in hopes to stifle demand for products potentially harmful to one’s health. The state government maintains the inelasticity of demand of these products by increasing the tax burden on smokers as more and more quit with a greater sales tax burden most. The revenue demand remains inelastic while the actual demand is elastic. 
This is a form of social control through market incentives. An example of a direct tax that is inelastic is the state property tax because real estate prices remain relatively stable and demand for real estate is almost equally stable. State governments are almost guaranteed revenue from property taxes.  
Countercyclical Fiscal Policies
Countercyclical fiscal policies are tax policies that react to the peaks and valleys that characterize the short-term business cycle. Countercyclical fiscal policies are an interventionists approach to taxation that have clear economic ramification. Cyclical fiscal policies wield the economic influence of the state to achieve the economic and political expediencies of a state. All political philosophies have opinions on when countercyclical fiscal policies are appropriate. Countercyclical fiscal policies assume that the role of the government is to push the state economy into the right direction. 
Countercyclical fiscal policies can be as simple as lowering the tax rate during a period of economic economic boom or budgetary surplus or as complex as creating a system of tax exemptions, deductions, and credits on income taxes to influence and incentives certain economic behaviors among different social classes. The most effective countercyclical fiscal policies are accomplished by the federal government because the federal government holds the bulk of the political power in the American system of government. State governments, on the other hand, are well equipped to manage economic problems that concern a state by managing its fiscal policy.
Cyclical Fiscal Policies

Cyclical fiscal policies adopt a non-interventionist approach to the state of the economy. These fiscal policies go with the flow of the market trends. This can either be accomplished by a state government by creating active financial incentives to participate in a certain market behavior or to do nothing at all. Most proponents of cyclical fiscal policies opt to have as little influence over the economy as possible. 
The government takes a less active role in changing taxes according to the business cycle. It is far less reactionary than countercyclical fiscal policies. Cyclical fiscal policies are adopted to maintain the economic status quo through non-interventionism in the economy of a state.

Non-Cyclical Fiscal Policies
Theoretically, these are fluctuations of the tax rate that are independent of the short term business cycle. The most striking long term market change is the monetary phenomenon of deflation or inflation. States cannot constitutionally manipulate monetary policy. Sound monetary policy is the primary means of combating currency inflation or deflation. Therefore, states have no control over non-cyclical fiscal policies given conventional economic wisdom. Some economists argue that the federal government no longer has the authority to manage monetary policy as the Federal Reserve is a private bank; therefore, the federal government is not even capable of managing monetary policy.

Economic Classification Relating to Taxes

Economic Classification Relating to Taxes

There are numerous economic classifications that pertain to taxes. There are progressive and regressive taxes. In both cases those taxes can be a determination in income elasticity and inelasticity. In addition, an individuals disposable income can be greatly influenced by the manner in which those taxes are collected. For example, taxes collected in a cyclical manner, do not allow taxpayers to utilize that money to invest or collect interest until their taxes are actually due. There are many factors that influence taxes and the manner in which those taxes directly effect the economy, allow for economic classification.
A progressive tax would be one that is influenced by an individuals income. For example, the VAT, or Value Added Tax, could be progressive if more expensive, non essential items were taxed at a higher rate. Currently, sales taxes are regressive because they are issued at a flat percentage of the cost of an item. Regressive taxes give those with a lesser income, a greater tax burden based on the tax as a percentage of their salary. Income elasticity can be greatly effected by either type of tax. 
If for example, bus rides were taxed at a flat rate, those with lesser salaries may no longer be able to afford those bus rides and they would become income elastic. Income elastic goods and services are based on the sale of items in proportion with income. If however, an individual required that bus ride to get to work, it would be income inelastic and the purchase of other items would become income elastic as a result of the decrease in disposable income. 
If however, bus rides were taxed repressively based on income, rather than the cost of the bus ride, the ride would remain unaffected by the tax because each tax payer would theoretically be able to afford the tax. Regressive taxes are often unrealistic because that would mean some proof of income would be necessary for every purchase. The only was to enact a true progressive tax would be to cancel all taxes except income taxes. Income taxes would then be determined as a direct percentage of income. Even that is unrealistic.
Economic classifications for taxes can be made based on the effect of those taxes in several forums. Economic classifications of elastic income and inelastic income, determine the likelihood that the purchase of goods and services will be effected by taxes. Regressive taxes have a larger overall impact on the lower and middle class. The economic classification of progressive taxes is determined by the taxpayers those taxes effect. Progressive taxes are likely to increase the sales of items to the lower and middle class.

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