Indirect Taxes

Flashcards covering key concepts related to indirect taxes, their impact, advantages, disadvantages, and justifications.

What is an indirect tax?

A tax imposed by the government that increases the supply costs of producers and is levied on the consumption, sale, or use of goods and services.

How does an indirect tax affect the price and quantity demanded of a product?

An indirect tax increases the price of a product, reducing the quantity demanded, but does not shift the demand curve.

What is a unit tax?

A set amount of tax per unit sold that causes a parallel shift in the supply curve.

What is an ad valorem tax?

A percentage tax based on the value added by the producer.

What are some advantages of indirect taxes?

They correct market failures, deter consumption of harmful goods, provide a source of revenue for the government, help tackle climate change.

What are some disadvantages of indirect taxes?

They are regressive, can lead to tax avoidance, may cause shadow market activity, and can result in government failure or unintended consequences.

What is a regressive tax?

A tax that takes a higher percentage of income from those on lower incomes.

What are justifications for imposing indirect taxes?

To fund government spending, change consumer and producer behavior, address market failures, and improve a country's trade balance through import duties.