LS11 - Taxes & Subsidies Flashcards
What is direct tax?
Tax directly levied on an individual or corporation
What are examples of direct tax?
Income tax
Corporate tax
What is indirect tax?
Tax levied on a good or service
What are examples of indirect tax?
VAT
Corporate tax on profits
What is specific tax?
When tax is the same fixed amount at all prices
What does specific tax cause?
Causes a parallel shift in the curve (left shift of supply)
What is Ad Valorem Tax?
Tax increases as the amount sold rises
What does Ad Valorem tax cause?
Left shift of supply which isn’t parallel
What are examples of Ad Valorem Tax?
VAT
Import tarrifs
Why do government impose taxes?
To raise government revenue and/or discourage certain economic activities (smoking…)
What is a subsidy?
Grant given by the government to encourage production
What does a subsidy do to supply?
Increases and causes a right shift in supply
How does amount of tax that a firm or consumer pay vary?
If good/service has inelastic demand - consumer can pay the whole extra tax on it
