MICRO - LS11 - Taxes & Subsidies Flashcards
Direct tax
A tax levied directly on an individual/organisation
Indirect tax
A tax levied on a good/service
Direct tax example
Income tax
Indirect tax example
VAT
Specific tax
Causes parallel shift in supply curve
The tax is the same fixed amount at all prices
Specific tax examples
Beer duty/fuel duty
Landfill tax is £80 per tonne of waste
Ad Valorem tax
Causes a non-parallel shift in supply curve
Tax increases as amount sold rises
Ad Valorem tax examples
VAT, import tariffs
Iowa has a 6% sales tax
Why is fuel heavily taxed and what type of tax is it
Indirect, specific
As it’s a necessity - people will buy it - constant stream of income for gov
Why is alcohol/cigarettes heavily taxed
Addictive - people will buy it so guaranteed stream of income
Known as ‘sin taxes’
Corporation tax in UK - what type and how much
Direct
25% - went up in budget due to deficit
What type of tax is VAT and how much is it
Indirect tax, Ad Valorem
Usually 20%
Reduced to 5% in covid to encourage consumption (July 2020)
Then 12.5% from Oct 2021 to 31 March 2022
Why do governments impose taxes
- in order to raise government revenue e.g. for NHS/Schools
- discourage certain economic activity e.g. smoking/pollution
Why do governments give subsidies
- give to firms to encourage productions
- costs are cheaper for firms
Subsidy definition
Money given by the government to encourage production that’s not payed back
The incidence of tax
The burden of the tax - who actually pays it
Taxes evaluation (advantages & disadvantages)
- reduces gov revenue as it can cause a fall in spending
- reduces spending as less disposable income
- discourages people from working hard
- corrects market failure e.g negative externalities
- deters consumption of goods that are bad to consume
- gov failure/unintended consequences
- tax evasion
- hard to determine best tax size
Subsidies evaluation
- opportunity cost e.g. subsidy cost could of gone to NHS
- danger of others governments retaliates and introducing subsidies, can effect trade relations
- government failure - by introducing subsidies there is intervention instead of free market survival - should be price mechanism not gov increasing supply
- Depends on PED - may not be enough to help firm
- could be unintended consequences
What does CAP stand for
Common agricultural policy
What is CAP
EU policy - gives subsidies to farmers to help sustain livelihood
Gov agreed to pay till next election
