1.2.9: Indirect Taxes & Subsidies

Question 1

What is an indirect tax

Answer 1

• A tax on expenditure where the business is required to pay the tax but the consumer is charged instead

Question 2

What are the two types of indirect tax?

Answer 2

• Ad valorem tax, where the tax payable increases in proportion to the value of the good; the tax is percentage of the cost of the good eg VAT
• Specific tax, where an amount is added to the price eg excise duties on alcohol, tobacco and petrol where they are a specific amount eg 10p a litre

Question 3

What is the incidence of tax?

Answer 3

• the tax burden on the taxpayer

Question 4

How does tax change with elasticity?

Answer 4

• In general, the more elastic the demand curve or the inelastic the supply curve, the lower the incidence of tax on the consumer, meaning the supplier has to pay more
• With ceteris paribus, the more inelastic the demand curve, the higher the revenue of tax for the government as the quantity demanded falls less and the more goods that are bought, the higher the tax revenue.

Question 5

What is a subsidy/

Answer 5

• A grant given by the government to encourage the production/ consumption of a good or service