TOPIC 4 - TAXES, SUBSIDIES AND INCIDENCE Flashcards
WHAT IS A DIRECT TAX?
TAX ON AN INDIVIDUAL/ ORGANISATION AND AFFECTS DEMAND.
WHAT IS AN INDIRECT TAX?
TAX ON EXPENDITURE ON GOODS AND SERVICES AND AFFECTS SUPPLY AS FIRMS HVE TO PASS ON THE TAX TO THE GOVT.
WHAT ARE THE 2 TYPES OF INDIRECT TAXATION?
- SPECIFIC TAX
- AD VALOREM
WHAT IS A SPECIFIC TAX?
AMOUNT CHARGED IS FIXED PER UNIT E.G EXCISE DUTIES OF £5 PER PACKET ON CIGARS.
WHAT IS AN AD VALOREM?
AMOUNT CHARGED IS A % OF THE PRICE E.G VAT AT 20% OF THE FINAL PRICE.
WHAT IS A TAX INCIDENCE?
REFERS TO WHO PAYS FOR A TAX.
WHAT IS THE INCIDENCE OF A DIRECT TAX?
DIRECT TAXES CAN’T BE PASSED SO INCIDENCE IS PAID BY THE INDIVIDUAL/ ORGANISATION.
WHEN DO PRODUCERS PASS ON MOST OF A TAX TO CONSUMERS?
WHEN DEMAND IS INELASTIC.
WHAT IS DEADWEIGHT LOSS?
PORTION OF THE LOST CONSUMER AND PRODUCER SURPLUS WHICH DOES NOT TRANSFER TO THE GOVT. CALLED THE DEADWEIGHT LOSS AS RESOURCES ARE NOT BEING ALLOCATED EFFICIENTLY.
WHAT IS A SUBSIDY?
A GRANT USUALLY PROVIDED BY THE GOVT TO ENCOURAGE SUPPLIERS TO INCREASE PRODUCTION OF A GOOD/ SERVICE.
WHY DOES THE GOVT GIVE SUBSIDIES?
- TO INCREASE OUTPUT OF POSITIVE EXTERNALITIES E.G VACCINES.
- TO REDUCE INEQUALITY AND MAKE PRODUCTS CHEAPER E.G FREE BUS PASSES.
