8) Tax - MB Flashcards
Tax:
what is tax?
compulsory fees levied on individuals or firms by government
Tax:
what is indirect tax?
a tax levied on expenditure on goods or services
Tax:
what is direct tax?
a tax charged directly to an individual based on a component of income
Tax:
what is ‘incidence of a tax’?
the way in which the burden of paying a sales tax is divided between buyers and sellers
Tax:
what is specific tax?
a tax of a fixed amount imposed on purchases of a commodity
Tax:
what is ad valorem tax?
a tax levied on a commodity set as a percentage of the selling price
Tax:
what is an ‘excess burden of a sales tax’?
the deadweight loss to society following the imposition of a sales tax
Tax:
what is a ‘polluter pays principle’?
an argument that a firm causing pollution should be charged the full external cost that it inflicts on society
Tax:
what is VED?
Vehicle Excise Duty, basically road tax
Tax:
state examples of tax: (12 examples)
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
Tax:
Government raises revenue with taxes on goods and services, what sort of tax is this?
indirect tax
Tax:
what is an example of specific tax?
eg fuel duty are an amount based on quantity sold
Tax:
what do specific taxes do to the supply curve?
shift the supply curve left without affecting elasticity
Tax:
what is an example of ad valorem tax?
eg VAT are a % based on the selling price
Tax:
what do ad valorem taxes do to the supply curve?
shift the supply curve to the left and make PES more inelastic
Tax:
what are demerit goods?
goods the government wants less consumption of
Tax:
what type of goods have the highest taxes?
often on demerit goods with the highest negative externalities (eg alcohol and tobacco)
Tax:
what are the negative externalities on examples like alcohol and tobacco?
- drink driving
- 2nd hand smoke that leads to cancer
Tax:
why are taxes higher for demerit goods that have negative externalities?
- 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
Tax:
what is ‘hypothecation’?
spending tax revenue in the same area in which the revenue was generated
eg tax used for things like treatment of 2nd hand smoke
Tax:
on the tax diagram, what shows the total tax revenue raised?
the shaded area
Tax:
how does tax reduce market failure?
- 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
Tax:
what is the effect of specific tax?
is to reduce supply from So to S1 because it increases producers’ costs so less will be supplied at any given price
Tax:
what is the effect of the consumer burden?
- Price Increases
- Quantity Decreases
Tax:
what is the effect of producer burden?
- The Quantity decreases
- The revenue they receive is lower
Tax:
what does the amount the government raise in tax depend on?
- the relative PED and PES of the good
a tax on a good that has an … PED, leads to a proportionately smaller fall in quantity demanded
a tax on a good that has an inelastic PED ( compared to PES)
a tax on a good that has an … PED (compared to PES_ leads to a proportionately larger fall in quantity demanded
an elastic
why are necessities like fuel, taxed heavily by the government?
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
why is fuel and tobacco so heavily taxed?
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
what’s the effect of a specific tax, using the diagram?
is to reduce supply from S0 to S1 because it increases producers’ costs so less will be supplied at any given price
on the tax diagram what shows the total tax revenue raised?
the size of the shaded area (P1 - P2)
as a result of tax, what does the tax diagram show?(analyse)
Price rises from P0 - P1 and there is a contraction in demand - the new market equilibrium is at P1Q1
what does the tax diagram show if demand is relatively price inelastic?
the increase in price caused by the tax is proportionately larger than the resulting fall in quantity demanded
what does it mean for producers or consumers if the price is relatively price inelastic?
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)
Evaluation: what does the change in demand depend on? (2 things)
- 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)
Evaluation: what is indirect tax good for? how does the change in demand depend on PED?
- 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
Evaluation: what are the advantages of tax? (list 2 things)
1) Market based solution
2) Raises revenue
Evaluation: explain how an advantage of tax is it is a market based solution?
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
Evaluation: what can the revenue from tax be used for?
can be hypothecated and used to mitigate the harm caused by the negative externalities
Evaluation: what are the 3 disadvantages of tax?
1) hard to value the negative externalities
2) the redistribution effects
3) collection issues
Evaluation: how is it hard to value the negative externalities of tax?
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
Evaluation: how does tax cause bad redistribution effects?
indirect taxes are regressive (burden on the poor) because they take a greater proportion of income from lower income households than higher income households
Evaluation: how do taxes cause collection issues?
some taxes may be expensive to collect, or those responsible for paying can avoid the tax by relocating abroad to avoid tax
what is regressive tax?
causes a burden on the poor
what is progressive tax?
burden on the rich
