Indirect taxation

Indirect taxation

Tax on a specific good (demerit goods)

Government intervention

Correct any market failure

Types

Indirect taxation

Subsidies 

Achieve

Fairer or more equitable distribution of income and wealth 

Achieve the governments macroeconomics objectives for the money 

Indirect taxation

Tax on activities imposed on suppliers e.g. VAT, council tax

Unit taxes : These involve a fixed amount being added per unit of a good or service such as that on bottles of alcohol

Percentage or ad valorem tax : these involve adding a percentage of the price of a good or service

When demand is inelastic

Tax is passed onto the consumer

When demand is elastic 

Tax is paid by the producer 

Indirect tax strengths

Can be used to reduce the consumption of demerit goods by raising the price that consumers must pay

Revenue raised can be used to pay for the external costs produced e.g. healthcare needed for smokers

Indirect tax weaknesses

Consumers and producers surplus will be reduced this will result in a deadweight loss for society i.e. the benefit enjoyed by consumers and producers is reduced

Unfair impact on the poor

Ineffective if demand is inelastic

Examples of use 

Cigarettes

Alcohol 

Petrol