Introduction
Today, hardly any product on the market does not have a tax. These taxes are the only way that a government can be sure that it will be able to pay its civil servants and do business. The rate of tax is entirely determined by experts in economics.
Step 1
The rate of tax cannot be determined without proper consideration by economists. A small miscalculation can lead to very diverse effects. Indeed a mistake can lead to either great losses or ridiculously high gains. This is why government employs the best economics experts to determine the amount of taxes that should be added or deducted from goods and services. The budget that is read out by the government minister yearly lists the taxes added and those reduced.This affects the rate of tax
Step 2
The rate of tax is also determined by the level of and standard of living of the people. Where the standard of living is high increase of taxes on some things such as export may not be a negative thing. Where the cost of living is too high it would not be wise to increase the taxes on commodities as this would lead to a great out cry among the people.
Step 3
The rate of tax is also determined based on the nature of the commodity. A commodity that enjoys a perfectly elastic demand cannot be taxed more as the back lash would be severe. This means that such a commodity should not be made to bear additional taxes other than those that it already bears. Such a commodity with a demand that is elastic will at once drop when its price increases following additional taxes.
Step 4
In a situation where a product enjoys an elastic demand, the rate of tax can be adjusted upwards without affecting people negatively. Though the price of that commodity would increase, the demand would be negligibly affected. In such a situation, the government can increase taxes on these goods and get away with this. This is contrary to those goods that have a perfectly elastic demand.
Step 5
On the market, other goods have a demand that is affected by the price in a 50-50 basis. In such a case to increase the rate of tax means that the demand will drop equally fast. This is due to the fact that the suppliers would be forced to increase the price of the goods. When the price of such goods goes up it then follows that the demand for the very goods will go down fast. This would definitely influence the rate of tax.
Tips
The rate of tax that a commodity attracts should be determined by the demand that that commodity enjoys. If the commodity has perfect elasticity, then there is no way taxes can be imposed without risking a great fall in demand. On the other hand, a product that has an inelastic demand can attract taxes without its demand falling as fast as that of elastic demand.
