Tax Elasticity
Tax elasticity, which is frequently measured by GDP, assesses the direct response of tax receipts to changes in the national income (or of tax revenue components to changes in parts of GDP). Simply said, tax elasticity shows how sensitive tax revenue is to changes in the chosen base measure over time. When assessing tax elasticity, tax rates, tax bases, and the effectiveness of revenue collection are not taken into consideration. The effects of changes in the levels of the underlying reference series are all that is taken into account by tax elasticity, not the consequences of changes in the tax structure.
Principles of Tax Elasticity
- At higher rates, tax elasticity is expected to be more common. This implies that the tax base is not adversely impacted when tax rates are initially raised. But if rates rise, it’s easier to see how the tax rate will be negatively impacted.
- In the long run, the flexibility of tax rates is more apparent. This indicates that the effects are not as severe if taxes are temporarily raised by the government to generate some quick cash.
Important Terms
- Inelastic taxes: These taxes have tax bases that are relatively insensitive to changes in tax rates. Taxes imposed on sinful products like cigarettes and alcohol typically fall under this heading. Increasing the tax rate increases tax revenue because the demand for these goods remains mostly unchanged.
- Unitary Elastic Taxes: There are no such things as unitary elastic taxes. The percentage change in the tax rate is exactly equal to the percentage change in the tax base under unitary elastic taxes. For instance, a 10% increase in tax rates will result in a 10% reduction in the tax base. The tax revenue is unaltered since it is the sum of the tax rate and the tax base. A drop in one exactly counterbalances a gain in the other.
Surge in Direct Tax Collections and Tax Elasticity
According to data from the Direct Tax Collections for the Financial Year 2022–23 as of mid–June, net collections increased by 45% from the prior year. Corporation tax has the highest percentage of the total amount of Net Direct Tax collected, followed by Personal Income Tax (PIT), which includes Security Transaction Tax (STT), and other taxes.
Corporation Tax receipts of 74,356 crores and Personal Income Tax receipts, which comprise the Security Transaction Tax of 1.11 lakh crore, make up the direct receipts from April 1 to June 15. Over the same time the previous year, revenues totaled 92,762 crores.