1.2.9 Indirect taxes and subsidies

Question 1

Indirect tax:

Answer 1

An indirect tax is a tax on expenditure where the person who is ultimately charged the tax is not the person responsible for paying the sum to the government

Question 2

Ad Valorem:

Answer 2

Ad valorem tax is where the tax payable increases in proportion to the value of the good. The tax is a percentage of the cost of the good, for example VAT.

Question 2

Unit tax:

Answer 2

Specific tax is where an amount is added to the price. The tax increases with the amount bought rather than the value of goods. For example, excise duties on alcohol, tobacco and petrol are a specific amount (e.g. 10p a litre

Question 3

What does tax lead to…

Answer 3

increase in the cost of production

Question 4

Incidence of tax:

Answer 4

Tax burden on the taxpayer

Question 5

Subsidy: (2)

Answer 5

• A grant given by the government to encourage production of a good or service
• The value of the tax is measured by the vertical distance between the supply curves