8) Tax - MB

Question 1

Tax:

what is tax?

Answer 1

compulsory fees levied on individuals or firms by government

Question 2

Tax:

what is indirect tax?

Answer 2

a tax levied on expenditure on goods or services

Question 3

Tax:

what is direct tax?

Answer 3

a tax charged directly to an individual based on a component of income

Question 4

Tax:

what is ‘incidence of a tax’?

Answer 4

the way in which the burden of paying a sales tax is divided between buyers and sellers

Question 5

Tax:

what is specific tax?

Answer 5

a tax of a fixed amount imposed on purchases of a commodity

Question 6

Tax:

what is ad valorem tax?

Answer 6

a tax levied on a commodity set as a percentage of the selling price

Question 7

Tax:

what is an ‘excess burden of a sales tax’?

Answer 7

the deadweight loss to society following the imposition of a sales tax

Question 8

Tax:

what is a ‘polluter pays principle’?

Answer 8

an argument that a firm causing pollution should be charged the full external cost that it inflicts on society

Question 9

Tax:

what is VED?

Answer 9

Vehicle Excise Duty, basically road tax

Question 10

Tax:

state examples of tax: (12 examples)

Answer 10

1) income tax
2) national insurance
3) VAT
4) Corporation tax
5) Council Tax
6) Fuel Duty
7) Business Rates
8) Alcohol Duty
9) Tobacco Duty
10) Air Passenger Duty (based on journey length and legroom)
11) landfill tax
12) VED

Question 11

Tax:

Government raises revenue with taxes on goods and services, what sort of tax is this?

Answer 11

indirect tax

Question 12

Tax:

what is an example of specific tax?

Answer 12

eg fuel duty are an amount based on quantity sold

Question 13

Tax:

what do specific taxes do to the supply curve?

Answer 13

shift the supply curve left without affecting elasticity

Question 14

Tax:

what is an example of ad valorem tax?

Answer 14

eg VAT are a % based on the selling price

Question 15

Tax:

what do ad valorem taxes do to the supply curve?

Answer 15

shift the supply curve to the left and make PES more inelastic

Question 16

Tax:

what are demerit goods?

Answer 16

goods the government wants less consumption of

Question 17

Tax:

what type of goods have the highest taxes?

Answer 17

often on demerit goods with the highest negative externalities (eg alcohol and tobacco)

Question 18

Tax:

what are the negative externalities on examples like alcohol and tobacco?

Answer 18

• drink driving
• 2nd hand smoke that leads to cancer

Question 19

Tax:

why are taxes higher for demerit goods that have negative externalities?

Answer 19

• the aim is to internalise the negative externality; make the producer/consumer of the good pay for the external cost as well as private cost of their actions
• the tax revenue can then be spent by government reducing the harm caused to third parties by consumption

Question 20

Tax:

what is ‘hypothecation’?

Answer 20

spending tax revenue in the same area in which the revenue was generated
eg tax used for things like treatment of 2nd hand smoke

Question 21

Tax:

on the tax diagram, what shows the total tax revenue raised?

Answer 21

the shaded area

Question 22

Tax:

how does tax reduce market failure?

Answer 22

• If the good or service was a demerit good, and overconsumed, this new equilibrium will be closer to the social optimum where marginal social cost equals marginal social benefit, and so is more allocatively efficient

Question 23

Tax:

what is the effect of specific tax?

Answer 23

is to reduce supply from So to S1 because it increases producers’ costs so less will be supplied at any given price

Question 24

Tax:

what is the effect of the consumer burden?

Answer 24

• Price Increases
• Quantity Decreases

Question 25

Tax: what is the effect of producer burden?

Answer 25

- The Quantity decreases - The revenue they receive is lower

Question 26

Tax: what does the amount the government raise in tax depend on?

Answer 26

- the relative PED and PES of the good

Question 27

a tax on a good that has an ... PED, leads to a proportionately smaller fall in quantity demanded

Answer 27

a tax on a good that has an inelastic PED ( compared to PES)

Question 28

a tax on a good that has an ... PED (compared to PES_ leads to a proportionately larger fall in quantity demanded

Answer 28

an elastic

Question 29

why are necessities like fuel, taxed heavily by the government?

Answer 29

goods with more inelastic PEDs, necessities like fuel, must be taxed particularly heavily by the government to reduce the quantity demanded by a significant amount

Question 30

why is fuel and tobacco so heavily taxed?

Answer 30

these are goods that have poor quality substitutes, tax rises beyond what is necessary to mitigate negative externalities, they are used as easy sources of tax revenue

Question 31

what’s the effect of a specific tax, using the diagram?

Answer 31

is to reduce supply from S0 to S1 because it increases producers’ costs so less will be supplied at any given price

Question 32

on the tax diagram what shows the total tax revenue raised?

Answer 32

the size of the shaded area (P1 - P2)

Question 33

as a result of tax, what does the tax diagram show?(analyse)

Answer 33

Price rises from P0 - P1 and there is a contraction in demand - the new market equilibrium is at P1Q1

Question 34

what does the tax diagram show if demand is relatively price inelastic?

Answer 34

the increase in price caused by the tax is proportionately larger than the resulting fall in quantity demanded

Question 35

what does it mean for producers or consumers if the price is relatively price inelastic?

Answer 35

means the tax is borne more by consumers than producers, this is because consumers are less responsive to change in price than producers (consumer burden)

Question 36

Evaluation: what does the change in demand depend on? (2 things)

Answer 36

- the size of the tax (eg the larger the tax, larger the fall in quantity demanded, the size of the tax determines its effectiveness at reducing quantity demanded) - PED (example on another flashcard)

Question 37

Evaluation: what is indirect tax good for? how does the change in demand depend on PED?

Answer 37

- Indirect tax is less effective at reducing quantity demanded in the case of goods that have inelastic PED but more effective at generating revenue to mitigate negative externalities - the elasticity of PED determines the effectiveness of the tax

Question 38

Evaluation: what are the advantages of tax? (list 2 things)

Answer 38

1) Market based solution 2) Raises revenue

Question 39

Evaluation: explain how an advantage of tax is it is a market based solution?

Answer 39

the externa cost of the negative externalities is internalised in the price of the good, leading to a fall in demand for the good and the level of production, reducing the size of negative externalities

Question 40

Evaluation: what can the revenue from tax be used for?

Answer 40

can be hypothecated and used to mitigate the harm caused by the negative externalities

Question 41

Evaluation: what are the 3 disadvantages of tax?

Answer 41

1) hard to value the negative externalities 2) the redistribution effects 3) collection issues

Question 42

Evaluation: how is it hard to value the negative externalities of tax?

Answer 42

it is difficult to measure the size of the external cost resulting from the negative externalities, and to base on this the size of the tax

Question 43

Evaluation: how does tax cause bad redistribution effects?

Answer 43

indirect taxes are regressive (burden on the poor) because they take a greater proportion of income from lower income households than higher income households

Question 44

Evaluation: how do taxes cause collection issues?

Answer 44

some taxes may be expensive to collect, or those responsible for paying can avoid the tax by relocating abroad to avoid tax

Question 45

what is regressive tax?

Answer 45

causes a burden on the poor

Question 46

what is progressive tax?

Answer 46

burden on the rich