Theme 1.4 - Taxation Flashcards
What are the 2 main groups of taxation?
Direct tax
Indirect tax
What does direct tax consist of?
Income tax
Corporation tax
Council tax
Inheritance tax
What does indirect tax consist of?
VAT
Fuel duties
Tobacco duties
Wine/beer/spirit duties
Who collects each respective form of tax?
Direct - Inland Revenue
Indirect - Customs + Excise
What is the primary purpose of indirect tax?
Applied to harmful/demerit goods
Penalize producers
What are the benefits of indirect tax?
Target particular industries
Incentive to reduce externalities
Revenue used to compensate victims
Based on principle that polluter pays
Size of externality should fall
Why does indirect tax cause the extent of an externality to fall?
Demerit good produced with higher price and lower quantity than before
What are the drawbacks of indirect tax?
Difficult to determine optimum monetary value
Firms less competitive due to rising costs
If demand is inelastic, impact may be minimal
Revenue may not be used appropriately
May encourage development of illegal markets
What is consumer burden of tax?
Reflects amount by which market value rises
What is producer burden of tax?
Reflects decline in revenue due to tax
How does taxation resolve market failure?
Prevents over cons + prod of demerit goods
Demerit goods appropriately prices
