Taxation Flashcards
Define indirect taxation
Indirect taxation is when the government places taxes on goods or services which increases a firms costs of production and therefore decreases their supply to the market. There are 2 types of indirect taxation:
- Specific
- Ad Valorem
Explain specific tax
A type of indirect tax - A specific tax, such as a tax on cigarettes is a fixed amount per unit - shown by a parallel inward shift in the supply curve
Explain Ad valorem
A type of indirect tax - An ad valorem tax is charged as a percentage of the price of a good or service (20% in the uk) and is shown by an increasing shift upwards on a supply curve (Higher the quantity demanded, the more people are willing tot pay therefore the more that is taxed on that price by a percentage) (£1 = 20p, £100 = £20)
How is indirect taxation affected by PED?
The more price inelastic demand is, the less effective an indirect tax will be in reducing use of the good.
The effectiveness of these taxes in reducing demand will be determined to some extent by the PED.
The more inelastic demand is, the more tax burdened on a producer can be passed on to the consumer burden.
How does an indirect tax shift the supply curve?
The imposition of an indirect tax shifts the supply curve inwards - reduction in supply, because of the increase in production costs = less incentive to supply.
How may a subsidy be affected by PED?
Subsidies from the government to increase the provision of a good will shift the supply curve outwards. Subsidies will be most effective when demand is price elastic, as small decrease in price will significantly increase demand.
