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Elastic Taxes at a Glance

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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