GI- Indirect Taxes Flashcards
What are indirect taxes used for
To raise the price of de merit goods and products with -ve externalities designed to increase the opportunity cost of consumption and thereby reduce consumer demand towards a socially optimum level
What is an indirect tax
A tax imposed on producers by the government e.g. duties on cigarettes and also VAT, also carbon tax
What is VAT
A tex placed on the expenditure (a tax set as a percentage of the price of the good)
How is an indirect tax shown on a graph
A tax increases costs of production causing an inward shift in the supply curve
On a graph where is the VAT
The vertical distance between the pre-tax and the post-tax supply curve
Can can an indirect tax be shifted
The supplier may be able to pass on some of all of the tax onto the consumer the the form of higher prices, the ability to do this depends on the price elasticity of demand and supply
What is a specific tax
A tax set per unit e.g. £5 tax per unit sold
What is ad valorem taxes
An ad valorem tax is a percentage tax e.g. 20% on the unit tax
What are the main taxes in the U.K.
- VAT- generating £110bn annual tax
- Fuel duties generate £27 bc
Effectiveness of a tax
- depends in part on elasticity
- problems with setting the tax rate at the right level to achieve aims
- unintended consequences
Problems with using taxes for a market intervention
- Setting the right tax rate
- Cost of collection
- Inelastic demand- higher petrol prices has little effect
- Redistribution effects- indirect taxes are regressive and affect low income households most
- Increased costs- high taxes may cause inflation
