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Inelastic Taxes at a Glance


Inelastic 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.

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