Indirect Taxes

What is an indirect tax?

A levy imposed by the government on the expenditure of goods and services, not directly on a person's income.

Who is responsible for paying the indirect tax?

Firms are required to pay the tax to the government.

Give an example of indirect taxes.

Cigarettes, Sugar, VAT, Petrol.

Why do governments introduce indirect taxes?

To raise tax revenue to spend, and to reduce consumption of certain products.

What happens to the supply curve when an indirect tax is imposed?

The supply curve shifts up (left) by the value of the tax.

What is a specific tax?

A set value tax per unit that shifts the supply curve up by that value.

What is an ad valorem tax?

A percentage tax where the firm pays a percentage of the price for each unit produced to the government.

What impact can an indirect tax have on consumers?

It can lead to a fall in demand due to an increase in price, shifting along the demand curve.

How does the income effect and substitution effect relate to indirect taxes?

They describe how consumers adjust their purchasing in response to price changes caused by the tax.

What happens to low-income earners as a result of indirect taxes?

They may be impacted the hardest, potentially increasing poverty and inequality.

What is a possible consumer behavior change due to indirect taxes?

Consumers may switch to unhealthy alternatives or continue using the product due to its inelastic demand.

How do producers respond to indirect taxes?

They may receive less revenue as quantity falls and could face a higher tax burden than consumers.

What does the government do with the tax revenue received from indirect taxes?

It can be used for public spending, such as the NHS, and can also fund negative advertisements to decrease demand.

What can government do to encourage demand for substitutes when indirect taxes are imposed?

The government can subsidize substitutes to further decrease demand for the taxed products.