Indirect Tax and Subsidies Flashcards
Ad valorem tax
An indirect tax based on a percentage of the sales price of a good or service. An increase in an ad valorem tax causes an inward shift in the supply curve.
Alcohol duties
Excise duties on alcohol are a form of indirect tax and are chargeable on beer, wine and spirits according to their volume and/or alcoholic content.
Black market
An illegal market in which the market price is higher than a legally imposed price ceiling. Black markets can develop where there is excess demand (or a shortage) for a product.
Direct tax
A tax on income and wealth e.g. income tax or corporation tax where the burden of the tax cannot be passed on to someone else.
Emission tax
A charge made to firms that pollute the environment based on the quantity of pollution they emit i.e. the volume of CO2 emissions.
Excise duties
Excise duties are indirect taxes levied on our spending on goods and services such as cigarettes, fuel and alcohol. There are also duties on air travel, car insurance.
Incidence of a tax
How the final burden of a tax is shared out. If demand for a good is price elastic and a tax is imposed, then the tax may fall mainly on the producer as they will be unable to put prices up without losing a lot of demand.
Indirect tax
An indirect tax is imposed on producers (suppliers) by the government. Examples include excise duties on cigarettes, alcohol and fuel and also value added tax.
Specific tax
A specific tax is a set tax per unit imposed by the government, a good example is the specific tax (duty) on fuel sold in the UK.
Subsidy
Payments by the government to suppliers that reduce their costs. The effect of a subsidy is to increase supply and therefore reduce the market equilibrium price.
Tax incidence
The manner in which the burden of an indirect tax is shared between participants in the market i.e. consumers and producers.
Unit tax
A specific tax per unit sold e.g. the duty on a litre of fuel might be 80 pence.
