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Inelastic Taxes at a Glance

Inelastic Taxes at a GlanceInelastic
taxes are a type of of indirect or direct taxes that state and local
governments depend on for an almost guaranteed revenue stream. The amount of
revenue generated from indirect taxes, like the sales tax, can be projected
based on the market’s demand for a certain item. Inelastic local taxes are
taxes on items whose demand is constant enough to be considered invulnerable to
market fluctuations in price. Inelastic taxes place the burden of paying the
tax on the firm that collects the sales tax. Consumer demand for a product is
high enough for the product and supply is relatively stable. Therefore, slight
changes in the price of a product does not influence the overall consumption of
the product. Vicariously, revenue streams are not influenced heavily by market
behavior as well. An example of an inelastic commodity applicable to sales tax
is clothing. The price of a t-shirt is generally, between 15 to 20 dollars.
Slight fluctuations in the price of a t-shirt do not influence the general
consumption of t-shirts; therefore, sales taxes on t-shirts are considered
inelastic. All states have some inelastic sales tax revenues. Some states
choose not to impose sales taxes on vital inelastic commodities such as raw
foods, opting to charge sales taxes on prepared food instead because these are
luxuries. Generally, inelastic commodities that are taxed are luxury
commodities like alcohol, tobacco, and even sweetened and carbonated beverages.

Sometimes sales taxes are raised on inelastic products to create a social
effect. For example, the inelastic commodity, tobacco has a higher sales tax
than clothing because cigarettes and other tobacco products are damaging to
one’s health. Since demand for tobacco is influenced by nicotine’s
addictiveness, demand is relatively unchanged among smokers. Some smokers quit
because taxes are too high, but revenue must remain constant. Therefore, the
government sees fit to increase tobacco taxes as a means of maintaining the
inelasticity of sales tax revenue while exhibiting good public relations with a
public increasingly aware of the dangers of smoking. Similar market theories
are used to justify the imposition of sales taxes on other inelastic
commodities that constitute a portion of revenue from local taxes.

The concept of an inelastic tax is applicable to direct taxation as well.
Direct taxation includes both income and property taxes. Property taxes are relatively
inelastic because demand for real estate within any given market is relatively
stable given there is not a wave of foreclosures or a natural disaster. Income
taxes, on the other hand, are not inelastic because they are subject to annual
changes in a person’s overall wealth.