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Consider the following statements:
1. Tax elasticity refers to the responsiveness of tax revenue growth to changes in the GDP of an economy.
2. Tax buoyancy refers to changes in tax revenue in response to changes in tax rates.
Which of the statements given above is/are correct?
1. Tax elasticity refers to the responsiveness of tax revenue growth to changes in the GDP of an economy.
2. Tax buoyancy refers to changes in tax revenue in response to changes in tax rates.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'D'. Can you explain this answer?
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Most Upvoted Answer
Consider the following statements:1. Tax elasticity refers to the resp...
- Tax buoyancy explains this relationship between the changes in the government’s tax revenue growth and the changes in GDP. It refers to the responsiveness of tax revenue growth to changes in GDP. When a tax is buoyant, its revenue increases without increasing the tax rate. The numerical estimate of tax buoyancy is very useful to understand the revenue performance of the economy. Hence statement 2 is not correct.
- A similar looking concept is tax elasticity. Tax elasticity refers to changes in tax revenue in response to changes in tax rates. Tax elasticity is the degree to which the increase in the tax rate causes a change in the tax base. Hence statement 1 is not correct.
- Tax elasticity is thought of as being more prevalent at higher rates. This means that when tax rates are first increased, the tax base isn’t negatively affected. However, once the rates go higher, the negative impact on the tax rate becomes more apparent
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Consider the following statements:1. Tax elasticity refers to the resp...
Explanation:
Tax Elasticity:
- Tax elasticity refers to the responsiveness of tax revenue growth to changes in the GDP of an economy.
- It measures how tax revenue changes in response to changes in the overall economic activity.
- Tax elasticity can be positive or negative based on the direction of the change in tax revenue with respect to GDP.
Tax Buoyancy:
- Tax buoyancy refers to changes in tax revenue in response to changes in tax rates.
- It measures the sensitivity of tax revenue to changes in tax rates, indicating how effectively tax revenue responds to changes in tax policy.
- Tax buoyancy can be used to evaluate the effectiveness of tax policy in generating revenue.
Conclusion:
- While tax elasticity measures the relationship between tax revenue and GDP, tax buoyancy focuses on the impact of tax rate changes on tax revenue.
- Therefore, both statements are incorrect as they refer to different concepts related to taxation.
Tax Elasticity:
- Tax elasticity refers to the responsiveness of tax revenue growth to changes in the GDP of an economy.
- It measures how tax revenue changes in response to changes in the overall economic activity.
- Tax elasticity can be positive or negative based on the direction of the change in tax revenue with respect to GDP.
Tax Buoyancy:
- Tax buoyancy refers to changes in tax revenue in response to changes in tax rates.
- It measures the sensitivity of tax revenue to changes in tax rates, indicating how effectively tax revenue responds to changes in tax policy.
- Tax buoyancy can be used to evaluate the effectiveness of tax policy in generating revenue.
Conclusion:
- While tax elasticity measures the relationship between tax revenue and GDP, tax buoyancy focuses on the impact of tax rate changes on tax revenue.
- Therefore, both statements are incorrect as they refer to different concepts related to taxation.
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