indirect tax Flashcards
what is indirect tax?
Indirect taxes are taxes levied on goods and services rather than on income or profits.
what does indirect tax do?
By imposing an indirect tax on a particular good, a government can influence the market price and consumption patterns,
reasons for indirect tax?
collect government revenue.
discourage consumption of undesirable and/or dangerous goods.
redistribute income within the population.
correct negative externalities and socially inefficient allocation of resources.
effect of indirect tax on consumer
Consumers are worse off after the tax, because they end up paying a higher price (Pc > P) and consuming a smaller amount of the good (Qt < Q).
effect of indirect tax on producer
Producers are worse off as they end up selling a smaller amount of the good (Qt < Q*) and receiving a lower final price (Pp < Pc) after paying the tax to the government.
effect of indirect tax on government
The government is now better off because it collects revenue from the tax, which can be used to spend on the provision of public goods and services or any other government expenditure.
most of society also better off as the raised price puts less of the demerit goods on the market
effect of indirect tax on workers
The market has become smaller, as fewer units of output are consumed and produced after the tax (Qt < Q*). If a lower amount of goods are sold then fewer workers are needed to produce them. Some workers might be fired and therefore the tax may lead to unemployment.
indirect tax GRAPH
consumer surplus = a
producer surplus = f
government tax revenue = b + d
DWL = c + e
real life examples indirect tax
between 2010 and 2020 the New Zealand government increased tax on tabaco by a 10% inflation each year
singapore GST is 7% on all goods and services
how is indirect tax useful in long and short term
add
how does the capitol land and labour relate
identiify
