Question

New York's  personal income tax elasticity is equal to 0.8 and its buoyancy is equal to 1.2....

New York's  personal income tax elasticity is equal to 0.8 and its buoyancy is equal to 1.2. Of the following which would best explain the cause of this difference?

A. The numbers have to be the same, this is an arithmetic error

B. a change in policy, for example a tax rate change led to an increase in revenue.

C. a change in policy, for example a tax rate change led to an decrease in revenue.

D. The state's personal income tax is regressive

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Homework Answers

Answer #1

Option C

Tax Buoyancy is defined as the change in tax revenue with respect to the change in tax rate.

i.e.

Tax Buoyancy = Change in tax revenue / Change in tax rate

Tax Elasticity is defined as the change in tax revenue with respect to the change in GDP.

i.e.

Tax Elasticity = Change in tax revenue / Change in GDP

So if tax elasticity is equal to 0.8 (i.e. less than 1), it means that tax revenues increased less proportionately than the GDP.. And if tax buoyancy is equal to 1.2 (i.e. more than 1), it means that tax revenues increased more proportionately than the GDP.

This clearly shows that change in tax rate caused less change in tax revenue, or a change in tax rate led to a decrease in tax revenue.

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