Indirect Taxes and Subsidies Flashcards
What is an indirect tax?
A tax on expenditure.
What are the two types indirect tax?
1) Specific/unit tax.
2) Ad valorem tax.
What is an ad valorem tax?
A tax that increases in proportion to the value of a good/service.
What is an example of an ad valorem tax?
VAT - e.g. 20% on most goods/services in the UK.
What is a specific/unit tax?
A tax that does not change with the value of the goods, but with the amount or volume of the good.
What is an example of a specific/unit tax?
Excise duties - e.g. 45p per pint of beer.
What is meant by the imposition of a tax?
The cost of a tax.
What effect will the imposition/increase in the rate of an indirect tax have on the supply curve?
A shift upwards and to the left of the supply curve.
What are the impacts of indirect taxes on consumers?
An indirect tax will raise the price of goods and services, so consumers will have to pay a higher price (the tax burden).
Why do governments impose indirect taxes (3)?
Governments will impose indirect taxes to raise income, for social services and to cover the negative externalities caused by an industry or a good/service.
What is the impact
of indirect taxes on producers?
As indirect taxes rise, so will costs of production. Producers will try to pass on a proportion of this tax incidence through higher prices. This could lower some firms competitiveness and could result in the loss of jobs.
How is the value of tax calculated?
Value of tax = difference between the old and new supply curve.
How is the incidence of tax on consumers calculated?
Incidence on consumers = difference between the old and new equilibrium prices.
How is the incidence of tax on producers calculated?
Incidence on producers = value of tax - incidence on consumers.
What is a subsidy?
A grant from the government to encourage the production or consumption of a particular good or service.
What is an input subsidy?
A subsidy used to reduce the costs of input used in production. E.g. an apprenticeship scheme will reduce the cost of labour.
What affect will subsidies have on the supply curve?
A subsidy will increase supply, as production costs fall. The supply curve will shift downwards and to the right.
What impact do subsidies have on consumers?
The introduction of a subsidy will reduce the price paid for a given good/service, increasing the utility of each unit consumed. The proportion of the subsidy received by the consumer is dependent on the PED of the good/service.
What impacts do subsidies have on governments?
Initially, the introduction of a subsidy is a cost to the government. However, in the long run, the subsidy will bring benefits to the economy, like the increased consumption of a desirable good/service, greater welfare to society, improved competitiveness and increased job security.
What impacts do subsidies have on producers?
The introduction of a subsidy will lower costs of production, increasing output and helping firms to profit and grow. The proportion of the subsidy retained by producers is dependent on the PED of the good/service.
If PED is inelastic, who pays the tax incidence and by how much?
Mostly paid by consumers.
If PES is inelastic, who pays the tax incidence and by how much?
Most paid by producers.
If PED is unitary, who pays the tax incidence and by how much?
Both producers and consumers pay an equal amount.
If PES is unitary, who pays the tax incidence and by how much?
Both producers and consumers pay an equal amount.
