2.7 Indirect Tax and Subsidies

Direct Tax

Taxes are paid directly from the incomes of individual (income tax) or from the income of business (profit tax)

Indirect Tax

Tax imposed on spending to buy goods and services

Excise Taxes (or excise duties)

A Type of Indirect Tax

Tax that is imposed on particular good or services, normally (but not always), because they have significant negative externalities

Taxes on spending on all (or most) goods and services

A Type of Indirect Tax

• GST (General sale Taxes) in the United States,

• VAT (Value add Tax) in the United Kingdom

• Good services tax in Singapore

Specific Tax

A Type of Indirect Tax

• A fixed dollar amount is imposed for each unit of good

• Amount of tax paid is independent of price of the good

For instance;

if a milk is at $3 dollars we need to pay $6 (tax is $3)

if a milk is at $7 dollars we need to pay $10 (tax is $13)

Ad-valorem Tax (supplementary information)

• A fixed percentage amount is imposed on each unit of output.

• As the percentage of the good increase, the amount of tax paid increase.

Real World Example
(Ad-valorem Tax)

• Sugar Tax in Asean

  • Laos: 5%-10% in soft sugar drinks

  • Vietnam: 10% to 20% in sugar tax

Direct Tax

Taxes are paid directly from the incomes of individuals (for example, income tax) or from the profit earned by businesses (known as profit tax). These taxes are based on the individual's or corporation's ability to pay, and they are often considered progressive, meaning higher earners pay a larger percentage of their income in taxes.

Subsidies

Refers to per-unit fixed amount of payment that are used to lower production costs and increase the output of the market

Single unit payment, for every unit you receive a certain amount of this.

Grants

Iumpsum of money

Reasons why government gives subsidies

• To support growth of industries

• To encourage exports and protect national industry from foreign competition.

To support growth of particular industry

Since subsidies have the effect of increasing the output, they could help industry to grow. Governments make want particular industries to grow because they provide positive externalities related to environmental benefits or they want to protect it during its development

To encourage exports and protect national industry from foreign competition.

Subsidies reduce export crisis which helped firms sell more exports. The government may want this because it will boost the economic growth and help its domestic needs to grow their business overseas.