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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.

  • 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.
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Price inelastic demand
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Price elastic demand
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