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.
The tax elasticity of supply must be less than 1 to boost revenues when rates are increased; if it is greater than 1,higher taxes will lower revenue.

Question

Quizplus · Accepted Answer

This statement is true according to the basic principles of tax elasticity. If the tax elasticity of supply is greater than 1, then an increase in tax rates will result in a decrease in revenue as the increased tax burden will cause producers to decrease their supply. On the other hand, if the tax elasticity of supply is less than 1, then an increase in tax rates will result in an increase in revenue as producers will continue to supply goods even with the higher tax burden.

An Increase in Tax Rates Will Yield Larger Tax Revenues