taxes and subsidies Flashcards
direct tax
- examples
taxes directly charged to an individual
- national insurance
indirect tax
- examples
taxes that are levied/charged on goods or services
- VAT, sugar tax, petrol tax, alcohol + cigarette exercise duty
Ad Valorem tax
- examples
taxes that are given by the % of the market value/price so the higher the price, the higher the tax.
- income tax, stamp duty, VAT, property tax
- causes the supply curve to decrease as well as steepen
controlled / specific / unit tax
- examples
set on volume, doesn’t account for market price
- cigarette tax
- supply curve only shifts to the left
effects of indirect taxes on supply
- incidence of tax
the supply decreases as producers have to set prices higher than the market price to ensure they can pay the tax. This decreases quantity as the price increases. The PED determines how much tax burden is shared by consumers or producers.
Elastic goods: more is shared by producers as demand changes due to price
inelastic goods: more is shared by consumers as even if the price rises, demand won’t change much
- therefore, the government love to tax inelastic goods as it generates higher tax revenues for them.
subsidies
- examples
grants are given by the government to increase the production of goods or services, which is common in the agricultural, green energy and small businesses industries.
e.g. apprenticeships, electric cars, solar panels
subsidies’ effect on supply
they cause the supply to increase, so the price decreases and quantity increases (consumer spending).
Effects of PED on who benefits from the subsidies:
Inelastic: consumers
elastic: producers
Effects of PES on who benefits from subsidies:
inelastic: producers
elastic: consumers
what does the government spend its tax money on?
welfare benefits: Job Seeker’s Allowance, disabled, elderly, childcare
- infrastructure
- NHS/ social services
- military
- foreign aid
