Indirect Taxation Flashcards
Indirect tax
a tax which is paid by firms according to the level of consumers’ purchases
Direct tax
affects AD; a tax which is paid directly from earnings income from households, profit from firms)
why are indirect taxes used?
indirect taxes are often used to restrict consumption e.g. because there are harmful health effects, harm to family, general harm to community
two types of indirect taxes
ad valorem and specific
ad valorem tax
a tax which is a certain percentage of the price i.e. the amount of money paid per unit varies
specific tax
a tax which is a certain fixed monetary amount, whatever the sales price is
excise duties
tax designed to discourage the purchase of particular goods
what do specific taxes enable
enables price changes to be made to price of the product and therefore its quantity
why is ad valorem tax used
it is applied to a group of products bc it would be too time consuming to calculate a different specific tax for each product e.g. VAT
if PED is more inelastic:
more people will carry on and there will be a bigger effect on tax revenue
if PED is more elastic
more people will stop consuming, therefore, the bigger effect will be on consumption
what are the effects of indirect taxation
if the government raises an indirect tax on a product, the supply curve will shift inwards, and equilibrium price will increase, and equilibrium quantity will decrease
why is equilibrium quantity decreasing a good thing
- There are fewer negative externalities because there is reduced quantity - fewer negative externalities
- There is more money for the government to use to improve the situation
