Question

Assume that when the government increases the sales tax on a good the price of the good increases. If the government wanted to increase revenues by increasing the sales tax, would the government increase the sales tax on a good which is price elastic or which is price inelastic? Please explain.

Answer 1

When the government will be increasing the sales tax on a good, the price of the good will be increasing, this is done by government in order to collect higher amount of taxes.

Price elastic goods are those goods whose demand will change due to change in price, and price inelastic goods are those goods,whose demand is going to stay the same even if there is changes in price so price inelasticity will be preferred by the government.

So, government will be trying to increase the the tax on those goods which are generally price inelastic because it will be helpful in collecting tax from a large group of individual as demand for these groups are not changing because they are price inelastic and they will still be buying the goods at Higher prices and paying higher taxes.