Tax Elasticity

Tax elasticity is a concept that compares how the yield of a tax responds to incremental changes in income. If receipts from a tax change faster than income, the yield is said to be elastic. If tax receipts do not change as fast as income, the tax is inelastic. Mathematically, the elasticity of a tax is computed as the percent change in tax receipts divided by the percent change in income. Thus, an elastic tax is one where this calculation leads to a total greater than 1, and an inelastic tax yields a measure less than 1. A tax elasticity of unity, or one, indicates that the yield of the tax changes at the same rate as income. This entry describes the elasticity of major ...