Indirect Taxes & Subsidies Flashcards
Indirect Taxes
Taxes on Spending, where the person who is ultimately charged the tax is not responsible for paying the tax to the government
2 Types: Ad Valorem (Percentage of the goods price), Specific (amount is added to the price, tax increases with amount bought rather than value of goods e.g. 10p per litre of petrol.
such as VAT and Excise Duties (Alcohol, tobacco, petrol)
REMEMBER WHEN MENTIONING TAXES TO MENTION THE IMPACT DEPENDING ON PED, Inelastic PED = Higher consumer burden
Ad Valorum Taxes
Indirect Taxes that are a percentage of spending e.g. VAT is 20%
Types of Indirect Tax
Ad Valorem - Tax is a percentage of the goods price (e.g. VAT 20%)
Specific Tax - Tax is added to the price. The tax is on the amount of the good bought rather than the value of the good e.g. 10p per litre of petrol
Subsidy
A payment from the government to producer or consumer, often fro producing a certain quantity of a good e.g. Gov gives £100 for every ton of steel produced
Objectives of Taxes & Subsidies
often used to increase government revenue, but can also be used to alter the market factors of S&D Subsidies can increase supply of a good, taxes can decrease it
PED impact of taxes
Elastic - Taxes are passed onto the producer more, as an increase in price leads to a greater decrease in demand Inelastic - Taxes are passed onto the consumer more, as a rise in price won’t affect Demand as much
Subsidy Cons
Can lead to X-Inefficiency (no motivation to be efficient)
Opportunity cost to government
Overreliant on subsidy
Consumer & Producer Burden Diagram
If Demand is inelastic, producer burden > Consumer burden
Consumer Burden = (14-10) x 80
Producer Burden = (10-8) x 80
Tax Incidence Calculation
CB = Consumer Burden Top Price - Bottom Price x Quantity
PB = Producer Burden Top Price - Bottom Price x Quantity
Tax Incidence def.
how the burden of a tax is distributed between firms and consumers
