CH14 Indirect taxes and subsidies

Question 1

indirect taxes can be either what?

Answer 1

indirect taxes can be either ad valorem taxes or specific taxes

Question 2

what is an indirect tax?

Answer 2

an indirect tax is a tax on expenditure

Question 3

what are the 2 major indirect taxes in the UK?

Answer 3

VAT and excise duties

Question 4

VAT is an example of what kind of tax?

Answer 4

VAT is an example of an ad valorem tax
-the tax levied increases in proportion of the value of the tax base.

Question 5

in the case of VAT, what is the tax base?

Answer 5

the tax base is the price of the good

Question 6

what percentage do most goods in the UK carry of VAT?

Answer 6

most goods in the UK carry a 20 percent VAT charge.

Question 7

what type of tax are excise duties an example of

Answer 7

excise duties are an example of a specific or unit tax.
-the amount of tax levied does not change with the value of the goods but with the amount or volume of the goods purchased

Question 8

what are the main excise duties in the UK?

Answer 8

the main excise duties in the UK are on alcohol, tobacco and petrol

Question 9

what is a subsidy?

Answer 9

a subsidy is a grant given by government to encourage the production or consumption of a particular good or service.
-subsidies, for instance, may be given on essential items such as housing or bread.

Question 10

what can price theory be used to analyse?

Answer 10

-price theory can be used to analyse the impact of the imposition of an indirect tax on a good
-assume that a specific tac of £1 per bottle is imposed upon wine. This has the effect of reducing supply. Sellers of wine will now want to charge £1 extra per bottle sold.

Question 11

what does the incidence of tax measure?

Answer 11

the incidence of tax measures the burden of tax upon the taxpayer

Question 12

what change will the imposition of an ad valorem tax lead to in a supply curve?

Answer 12

the imposition of an ad valorem tax will lead to a shift of the supply curve to the left.

Question 13

what will a subsidy on a good lead to?

Answer 13

a subsidy on a good will lead to an increase in supply
-at any given quantity supplied, the price will be lower. This is because the price charged by suppliers will be higher than the price paid by consumers

Question 14

the extent to which the tax incidence falls on consumers rather than producers depends upon what?

Answer 14

depends upon the elasticities of demand and supply.

Question 15

the more elastic the demand curve or the more inelastic the supply curve, the what will be the incidence of tax?

Answer 15

the more elastic the demand curve or the more inelastic the supply curve, the greater will be the incidence of tax on producers and the less will be the incidence of tax on consumers
-so far as the gov is concerned, taxation revenue will be greater, all other things equal, the more inelastic the demand for the product taxed.

Question 16

in general, when do subsidies tend to be given?

Answer 16

in general, subsidies tend to be given where the policy objective is to reduce the price of the good
-the largest fall in price will occur when either demand is highly inelastic or supply is highly elastic

Question 17

if demand is very elastic or supply very inelastic, will there be very much change in price following the granting of a subsidy?

Answer 17

no, there will be very little, if any, change in the price following the granting of a subsidy.
-this is because producers will not pass on the subsidy to consumers. They will absorb the subsidy, which will allow them to increase their profits