Question

What factors influence and are taken into account when imposing a tax?

Answer 1

Tax is an important part in an economy. It is used to correct the economy (like the imposition of tax if there is inflation) or it is used to meet the government budget deficit.

Factors affecting for tax are as below:

#) elasticity of demand: this is the ratio of percentage change in quantity demanded to percentage change in price. If such change in quantity is lower than the change in price, the item becomes inelastic and tax could be imposed; otherwise, in case of elastic demand, tax should not be imposed.

#) Necessity: products having huge necessity, like salt, sugar, and rice, should not be taxed in order to protect poor people. Luxurious goods, like AC, car, etc. could be taxed.

#) Income Inequality: if an economy faces huge income inequality, direct tax should be imposed to rich people for making transfer payments to poor people by the government. In this way income inequality could be shortened.