Indirect Taxes
Indirect taxes
Indirect taxes are taxes on expenditure a.k.a. taxes to suppliers. These taxes increase the production costs for producers, which causes producers to supply less.
Indirect taxes are taxes on expenditure a.k.a. taxes to suppliers. These taxes increase the production costs for producers, which causes producers to supply less.
- There are two types of indirect taxes, ad valorem tax and specific taxes.
- Ad Valorem taxes are percentage taxes e.g. VAT which adds 20% of the unit price.
- Specific taxes are set taxes which don’t vary per unit e.g. excise duties on tobacco.
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- The incidence of tax is the amount of the tax which is paid by consumers or producers. This differs between depending upon the PED of the good or service.
- If a good has a price inelastic demand then the incidence of the tax will fall mainly upon consumer because price doesn’t affect the number sales much.
- However, if the product has a price elastic demand then the incidence of the tax will fall mainly on the producers as sales would reduce drastically with increased price.
- In both cases, if you add producer and consumer burden you get the government revenue.
Price inelastic demand
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Price elastic demand
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