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Understanding the Factors of Income Elasticity

Income Elastic

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.

NEXT: Using an Income Tax Calculator

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