1.2.9 Indirect Taxes and Subsidies Flashcards
What are indirect taxes?
Taxes on expenditure -
What is specific tax?
Where the amount is added to the price. The tax increases with the amount rather than the value (i.e 10p per litre of petrol)
Form of INDIRECT TAX
What is AD valorem tax?
AD valorem tax is where tax payable increases in proportion to the value of the good - like VAT.
Form of INDIRECT TAX
What is a hypothecated tax?
When the government collects the tax with the promise that the funds will be used for a particular project, service, or program.
What is a direct tax?
A direct tax is a tax levied directly on individuals or organizations, based on their income, wealth, or property, such as income tax or property tax.
What is the impact of a specific tax on a S/D diagram?
Increase in cost of production = Supply reduces = Passed onto consumer = Consumer burden = producer sees rise in costs and fall in ouput = grey area
What is the impact of an ad valorem tax on a S/D diagram?
Increase in cost of production = Supply reduces = Passed onto consumer = Consumer burden = producer sees rise in costs and fall in ouput = grey area
It is kinked because when price is small tax is small but when price is high tax is high
What is the “incidence of tax”
Tax burden on the Taxpayer
If demand curve is perfeclty elastic or supply curve is perfectly inelastic, the supplier will pay all the tax. Vice Versa.
In general, what does the more elastic the demand curve is or the more inelastic the supply curve is mean regarding tax on consumers?
Lower the incidence of tax on the consumer - supplier pays more.
What does the inelastic - ness of the demand curve mean for government revenue?
Higher tax revenue - because quantity demanded falls less and more goods are brought.
Explain a subsidy diagram
Palmer Cole.
The total shaded areas = government spending.
