Sales Taxes

The government pays attention to elasticity of demand when it selects goods and services on which to levy sales taxes. If a $1 tax is levied on a product and 10,000 units are sold, tax revenue will be $10,000 (= $1 x 10,000 units sold). If the government raises the tax to $1.50 but the higher price reduces sales to 5000 because of elastic demand, tax revenue will decline to $7500 (= $1.50 x 5000 units sold). Because a higher tax on a product with elastic demand will bring in less tax revenue, legislatures tend to seek out products that have inelastic demand—such as liquor, gaso-¡j^ line, and cigarettes—when levying sales tax.

economi.htm> The drug war and economics

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