Taxes Flashcards
What is a tax?
Tax- compulsory charge- made by government - on 🚘, 🧹, incomes 💵 or capital
Why do governments tax?
Purpose- governments impose taxes to ⬆️ government revenue (pay for government spending programmes) and/or discourage certain economic activities
What are the 2 main types of taxes?
1) Direct tax
2) Indirect tax
What it is a direct tax & give examples?
Direct tax- tax levied directly on individual (personal income tax) or organisation (corporation tax- on company profits)
What is an indirect tax?
Indirect tax- tax levied on 🚘 or 🧹
What are the consequences of a direct tax and explain why these are the consequences?
IMPACTS AD (spending plans based on disposable income (income after tax))
What are the consequences of a indirect tax and explain why these are the consequences?
IMPACTS AS (firms have to absorb some effects of ⬆️ VAT (if all affects absorbed by consumers in prices-> sharp ⬇️ in demand) … ⬇️ willing to sell)
What are the 2 types of indirect tax?
1) Specific
2) Ad Valorem
What is a specific tax & give examples?
Specific tax causes parallel shift in supply curve
Tax- same fixed amount at all prices e.g.⛽️ duty, 🍺 duty
What is an Ad Valorem tax & give examples?
Ad valorem tax causes non-parallel shift in supply curve
Tax- ⬆️ as amount sold ⬆️ e.g. VAT, import tariffs
How do you calculate government/tax revenue?
Government/Tax Revenue = area of consumer burden + area of producer burden
OR
Government/Tax Revenue = unit rate of tax (y-axis length of consumer & producer burden/tax) x quantity = (total area of consumer & producer burden)
What are 4 key things to remember when doing calculations involving tax or calculations involving diagrams in general?
1) CONSUMER BURDEN = TOP
2) PRODUCER BURDEN = BOTTOM
3) ALWAYS VERTICAL DISTANCE
4) ALWAYS FIND AREA TO SECOND QUANTITY (EVEN IF PRODUCER & CONSUMER BURDEN/TAX NOT SEPARATED BY EQUILIBRIUM)
