indirect taxes

indirect taxes

Indirect taxes refer to taxes on expenditure. They are not charged directly based on people’s income or wealth. They are levied on the producer, but the producers shift some of the burden onto the consumer in the form of higher prices.

reasons for indirect taxes

• collect government revenue

• to discourage the consumption of undesirable and dangerous goods.

• redistribute income within the population.

• correct negative externalities and socially inefficient allocation of resources.

what are the different types of taxes?

specific tax: a fixed amount of tax imposed on a good or service per unit sold; for example, a tax of EUR 2 per can of beer.

Percentage tax or ad valorem tax: This is a fixed percentage charged on the selling price of the good; for example, a 20 percent tax on the price of cigarettes. In this case, the amount of the tax increases as the price of the good or service increases.

The effect of taxes on stake holders

• Consumers —> consumer expenditure on the good changes, with increased price and lower quantity. Consumers are worse off, because they end up paying more and consuming a smaller amount of the good.

• producers —> producer revenue falls. Producers are worse off as they end up selling a smaller amount of the good and receiving a lower final price after paying the tax to the government.

• government —> the government is better off because it collects revenue from the tax, which can be used to spend on the provision of public good and services or any other government expenditure.

• Employment —> The market has become smaller, so if a lower amount of goods are sold then fewer workers are needed to produce them. Some workers might be fired and therefore the tax may lead to unemployment. Workers are also worse off.

Note: while it seems like only the govt is benefitted, taxes are levied on goods that are deemed harmful for society, so others do gain from the reduction in the sale of those types of goods.