Elasticity of taxable income

Elasticity of taxable income refers to how sensitive the amount of taxable income is to changes in tax rates. When tax rates increase, some people might work less or find ways to report less income, causing their taxable income to drop. Conversely, if tax rates decrease, individuals may earn more, leading to higher taxable income. A higher elasticity means people change their income more in response to tax changes, while lower elasticity indicates they remain relatively stable regardless of tax rate adjustments. Understanding this concept helps policymakers predict the effects of tax changes on individual behavior and government revenue.