Indirect/direct Taxes And Subsidies Flashcards
(21 cards)
What is indirect tax?
Expenditure (on good or service itself) tax that increases costs of production for firms but can be transferred to consumers via higher prices
What is direct tax?
Tax on income that can’t be transferred to others e.g. income Tax, NI, Corporation tax
What are the two main reasons for indirect taxes?
1) Raise Government revenue e.g. VAT
2) Solve market failures e.g. Sugar tax, cigarettes, alcohol, Fuel duty (to reduce consumption or production of goods and services that do harm to society)
Specific indirect tax
Tax per unit e.g. Wine duty (every bottle of wine will be given the same value of tax)
Shift supply (S1 + tax) parallel to S, vertical distance represents the value of tax
Indirect Tax diagram
Explanation of indirect Tax diagram
1) Supply curve shifts upwards (left) from S1 to S1 + Tax
2) P&Q new equilibrium: Price increased from P1 to P2, Quantity has decreased from Q1 to Q2
3) Gov revenue: P2, b, C, E - the vertical different from the new equilibrium supply curve to the original is the tax per unit, (B,C) multiplied by all the units that have been sold (0 to Q2) which equals Gov revenue but is the same as finding the P2BCE box
4) Consumer Burden/incidence: Difference in price as consumers have to pay higher prices, so in this situation P1, P2, B, D
5) Producer Burden: P1, D, C, E,
6) Producer Revenue: P x Q, Fall from P1, A, Q1, 0 to E,C,Q2,0 as to get new revenue you must minus the gov revenue
7) DWL: ABC
Impact of Indirect tax on consumers?
Consumers - (DO NOT LIKE IT) raised prices, lower consumer surplus, lowers Q and choice and leaves consumer burden and indirect taxes are highly regressive so take a larger proportion of the income of low incomes households than higher. If demand is price inelastic the impact will be greater
Impact of Indirect tax on Producers/workers?
Producers/Workers - (DO NOT LIKE IT) for producers, will see lower producer revenue and their surplus will decrease, will be burdened. Workers may lose their job as labour is derived demand so Q falling there will be less need for workers to produce so could be harmed
What is ad Valorem tax?
tax as a % of the price being charged e.g. VAT 20%
Vertical distance will represent value of tax, 20% of a high price here would be a higher value taken from VAT so revenue would be higher for Gov, whereas 20% of a low price will give a lower Gov revenue
Impact of Indirect Tax on the government?
Gov - (WILL LIKE) can raise revenue, reduce gov failures by reducing those markets that do harm to society but will not like the unintended consequences on consumers such as harm on consumers, regressive nature of tax, harm to producers causing them to possibly shut down or leave the country, may be black markets created as well as DWL
Price elastic demand (PED) and indirect tax diagram
What are the burdens for indirect tax + Price elastic supply/demand
Consumer Burden:P2,B,D,P1 (LOWER)
Producer Burden: P1,D,C,E (HIGHER)
Government Revenue: Lower, as less units produced and sold with the fall from Q1 to Q2
PED = infinity? (Perfectly elastic) - consumer burden will be nothing, producers will take entire burden, due to no change in price and Gov revenue is lowest
Price Elastic supply (PES > 1)
Consumer burden: Higher
Producer Burden: Lower
PES = Infinity? Consumers bear entirety
Price inelastic demand and indirect tax diagram
What are the burdens for Price inelastic demand/supply with indirect tax
Consumer Burden: P2, B, D, P1 - Higher
Producer Burden: P1, D, C, E - lower, not a massive loss when increasing price due to inelasticity
Government Revenue: Higher
PED = 0? (Perfect inelastic), Consumer burden will take the entirety, Gov revenue will be highest
Price inelastic Supply (PES < 1)
Consumer Burden: Lower
Producer Burden: Higher
PES = 0? Producer burden will be everything
What is a subsidy?
Money grant to firms by the government to reduce the costs of production and encourage an increase in output
Why is a subsidy implemented?
1) Solve Market failures - to encourage more consumption and production of goods and services that are beneficial to the whole of society e.g. Vaccines, Healthcare, Public transportation
2) Increase affordability of necessity goods and services - reduces the price in their market which can be helpful to low income households to access the markets and afford essential goods and services
Subsidy diagram
Explanation of the subsidy diagram
1) Supply curve: downwards S1 to S1 + Sub
2) P & Q: Price reduced from P1 to P2 and Quantity increases from Q1 to Q2
3) Gov Cost: P2, B, C, D
4) Producer Revenue: increase from P1,A,Q1,0, to D,E,Q2,0
5) Consumer Savings: P1,P2,A,E
DWL: ABC
Impact of a subsidy on consumers?
Consumers: (Benefit but with LR concerns) prices fall, subsidies go up, low income households will have greater affordability of necessity goods and services, greater choice, consumer savings. BUT concerns of how subsidies are raised e.g. tax rises that hurts consumers, cuts to other areas of Government spending, Gov borrowing money so debt interest to pay providing opportunity cost
Impact of subsidies on Producers/Workers
Producers/Workers: Increase in producer revenues and surplus, workers will also love as due to higher quantity means more employment
Impact of subsidies on the Government
Government: if two main aims are met then they will like subsidies, but mindful of the expenses of these as well as opportunity cost or LR funding concerns. Also concerned about how consumers use these subsidies e.g. are they being used correctly or for other things such as savings in a bank, paying on debt or paying higher salaries to staff as well as producers becoming depended on subsidies and complacent and inefficient allowing other costs of production to rise knowing that they are given money from the government as well as DWL
