Indirect taxes and subsidies Flashcards
What are indirect taxes?
They are taxes on expenditure.
What are examples of an indirect tax?
VAT
Taxes on gambling
Excise taxes
What do these taxes cause?
They increase the cost of supply and therefore the supply curve will shift to the left.
What are the 2 types of indirect tax?
Ad valorem
Specific
What are ad valorem taxes?
They are a percentage of the price of the product. They will cause the supply curve to shift to the left and become steeper than the original supply curve.
What is an example for an ad valorem tax?
VAT
What is a specific tax?
They are a set amount per unit of the product. They will cause the supply curve to shift to the left, paralell to the original supply curve.
What is the incidence of tax?
It relates to how much the burden of a tax is distributed between different groups eg. producers and consumers.
What is a subsidy?
It is a grant from the government that has the effect of reducing costs of production. Subsidies cause the supply curve to shift to the right.
