1.2.9 Indirect Taxes and Subsidies Flashcards
(8 cards)
What is an indirect tax?
Indirect taxes are taxes imposed on the consumption, sale, or use of goods and services. This increases the cost of production for producers but is usually passed on to consumers in the form of higher prices.
Unlike direct taxes, indirect taxes are typically collected by intermediaries, such as businesses, at the point of purchase or consumption. Most indirect taxes are either specific taxes or ad valorem taxes.
What are some indirect taxes used in the UK?
Air Passenger Duty: Standard rate for UK flight is £14
Alcohol duties: 26.9% for wine, other fermented products and spirits
Betting, gaming and lottery duties: lottery duties at 12% of ticket sale price
Landfill Tax: standard rate at £126.15 per tonne
Soft Drinks Industry Levy: drinks with 5-8g sugar at 19.4p per litre. Drinks with over 8g at 25.9p per litre
Tobacco duties: for cigarettes 33.5p per cigarette plus 16.5% of retail price
Value Added Tax: standard rate at 20%
What is an ad valorem tax?
An ad valorem tax imposes a tax on a good or asset, depending on its value. The tax is usually expressed as a percentage. For example, in the UK, VAT is charged at 20% on most goods offered for sale.
Why might the government enforce indirect taxes?
A key source of tax revenue to pay for overall government spending
• Can be used to change consumer and producer behaviour such as the sugar tax or carbon taxes - this might alter the pattern of demand for goods and services
• Helps to address examples of market failure - an example is the landfill tax (to encourage recycling) and the sugar tax to combat diabetes and control health costs
• Indirect taxes such as import duties can be used to improve a country’s trade balance
What is a regressive tax?
A regressive tax is a tax imposed by a government which takes a higher percentage of someone’s income from those on low incomes. This means that those with lower incomes pay more in tax relative to their income.
What is a subsidy?
A subsidy is any form of government support-financial or otherwise-offered to producers and (occasionally) consumers.
Subsidies to producers reduce the marginal cost of supply. A subsidy usually leads to an increase in the output sold of a good or service at a lower market price.
What are some justifications for subsidies?
• Helping poorer families with food and childcare costs particularly during a crisis
• Improved nutrition can lift labour productivity and reduce the burden on health services
• Encourage output and investment in sectors such as life sciences and renewable energy
• Protect jobs in loss-making industries hit by recession and by external economic shocks
• Improve housing and transport affordability to improve geographical mobility of labour
• Reduce the cost of training & employing workers
• Encourage the arts and other cultural services which have social benefits
What are some drawbacks for subsidies?
• Producers can become “subsidy dependent”
• Subsidies can distort resource allocation
• Subsidies can lead to excess production / surpluses
• Environmental risks from excessive production
• Government failure arising from political lobbying
• Subsidies can be very expensive - taxpayers bear the cost
