How is elasticity related to the revenue from a sales tax?
a. If demand is inelastic, then raising tax rates will decrease tax revenue paid by consumers. This principle works similarly with supply. With elastic supply and demand, increasing taxes will increase quantity supplied and quantity demanded enough to cause an increase in tax revenue. Thus, what happens to total tax revenue depends both on the elasticity of supply and demand.
b. If demand is inelastic, then raising tax rates will decrease tax revenue paid by consumers. The elasticity of supply has no effect on taxes because taxes only matter to consumers (who have to pay the taxes). Thus, what happens to total tax revenue depends only on the elasticity of demand.
c. If demand is inelastic, then raising tax rates will increase tax revenue paid by consumers. The elasticity of supply has no effect on taxes because taxes only matter to consumers (who have to pay the taxes). Thus, what happens to total tax revenue depends only on the elasticity of demand.
d. If demand is inelastic, then raising tax rates will increase tax revenue paid by consumers. This principle works similarly with supply. With elastic supply and demand, increasing taxes will decrease quantity supplied and quantity demanded enough to cause a decrease in tax revenue. Thus, what happens to total tax revenue depends both on the elasticity of supply and demand.
