Indirect Tax Flashcards
What are the reasons for indirect taxes
Solve market failure - reduce production or consumption
Raise gov revenue
What is a indirect tax
Expenditure tax that increases costs of production for firms but can be transferred to consumers via higher prices
What are the two types of indirect tax
Specific
Ad valorem
Specific tax example
Wine Duty
Ad valorem tax example
VAT
How does an indirect tax affect the supply curve
Shift to the left
How does an indirect tax affect price and quantity
Increases price
Decreases quantity
How does an indirect tax affect government revenue
Increases
What do key stakeholders think
Consumers - not happy - raised prices, lower consumer surplus, lower choice, consumers are burden and are regressive
Producers/workers - low producer revenue, higher costs of production and lower producer surplus
Government - revenue, reduced market failure (unintended consequences, regressive and black markets)
How does an indirect tax solve market failure
Increase costs of production
Internalises externality
Solves overconsumption/production
Promotes allocative efficiency and generates government revenue
What could the government revenue generated be used for
Education
Advertising
Fund alternative policies or in combination
Subsidise alternatives
Rehabilitation
What are evaluation points for using an indirect tax to solve market failure
Price inelastic demand
Setting tax at the right level
Regressive
Black markets
