Taxes and subsidies Flashcards
Why are taxes imposed?
-Typically to raise finance for government expenditure.
-To correct market failures that influence production and consumption. Ex; Demerit goods are subject to high indirect taxes.
-To redistribute income - reduce the gap between the poor and the rich
Ex tax exemptions, transfers
What are direct taxes?
Income tax. corporate tax, capital gains tax
What are the canons of taxation?
Equitable = those who can afford to pay should pay more
Economic = the revenue should be greater than the costs of collection
Transparent = Taxpayers should know exactly what they are paying
Conveneient= it should be easy to pay
Efficiency = it shouldn’t provide a disincentive to work, it should increase economic efficiency
What are specific taxes?
it is a tax that is defined as a fixed amount for each unit of a good or service sold
What are the effects of a specific tax?
It reduces supply.
The supply curve will shift to the left parallely.
What are ad Valorem taxes?
An ad valorem tax is a tax whose amount is based on the value of a transaction.
What are the effects of an ad valorem tax?
The supply curve will shift to the left.
It will not be parallel to the original supply curve.
What’s the incidence of tax?
The extent to which the tax is borne by the producer or the consumer or both.
What’s a progressive tax system?
The proportion of income taken in taxation rises as income rises.
It will result in rich people paying higher taxes than the poor.
What’s a regressive tax system?
It indicates a tax fall as income rises. It is usually considered unfair to people on low incomes.
What’s a proportional tax system?
A proportional tax, also referred to as a flat tax, is a tax in which the percentage of tax taken from a person’s income remains the same, regardless of how much money he or she earns.
What’s the incidence of tax for a product with inelastic demand?
More tax burden for the consumers
Less tax burden for the producer.
What are subsidies?
It is a financial incentive given to producers to reduce the cost of production and increase supply.
What does the diagram for subsidies look like?
What’s the incidence of a subsidy when demand for a good is inelastic vs. elastic?
Inelastic = Consumer gains more, producer less
This is because there is a greater price fall in the market when there is inelastic demand
Elastic = Producer gains more, consumer less
This is because producer tries to get the full benefit from the subsidy than pass a large percentage onto consumers.
