1.2.9- Indirect Taxes And Subsidies Flashcards
What is an indirect tax?
A tax imposed by the government that increases the supply costs of producers
What is Ad Valorem tax?
A percentage tax depending on value
Eg. VAT, insurance premium tax
What is a specific tax?
An amount is added to the price
Eg. Excise duties (alcohol, tobacco, petrol)
Who does the incidence of tax fall mainly on if demand is elastic?
The supplier
Who does the incidence of tax fall mainly on if demand is inelastic?
The consumer
What are the justifications for indirect taxes?
-source of tax revenue to pay for gov spending
-can influence consumer and producer behaviour
-can improve a country’s trade balance
What is a subsidy?
A grant given by the government to increase production and reduce price
What are some examples of goods and services with subsidies?
Apprenticeships, solar panels, job furlough schemes, subsidising childcare
What are the justifications for subsidies?
-increase employment rate by making workers more skilled through apprenticeships
-reduces inequalities if progressive
-can boost demand
-encourages consumption of merit goods
Why are indirect taxes bad for consumers?
-increases price
-lowers consumer surplus
-lowers quantity
-regressive (take a high proportion of the income of low income households)
Why are indirect taxes bad for producers/workers?
-lower revenue
-reduced producer surplus
-may lose jobs due to Labour being a derived demand
Why are indirect taxes good for the government?
-raise revenue
-solve market failures
Why are indirect taxes bad for the government?
-harm consumers
-regressive nature
-harm producers
-producers may shut down or leave the country
-may be black markets produced
How is government revenue affected by putting an indirect tax on a price elastic good?
Lower revenue as quantity decreases so they gain less revenue from that tax
Who will have the incidence of tax for a perfectly elastic good?
Completely producers
