An increase in tax rates will yield larger tax revenues only if the absolute value of the tax elasticity of supply is less than 1.0.

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When the absolute value of tax elasticity of supply is less than 1.0, it means that the quantity supplied of the taxed good is not very responsive to changes in the tax rate. In such a situation, an increase in tax rates will result in a proportionately smaller decrease in quantity supplied, leading to an overall increase in tax revenues. This is referred to as an inelastic supply. However, if the absolute value of tax elasticity of supply is greater than 1.0, it means that the quantity supplied of the taxed good is highly responsive to changes in the tax rate. In such a situation, an increase in tax rates will result in a proportionately larger decrease in quantity supplied, leading to an overall decrease in tax revenues. This is referred to as an elastic supply.

An Increase in Tax Rates Will Yield Larger Tax Revenues