Indirect Taxes and Subsidies​ 2

INDIRECT TAX

A tax on expenditure.

Direct tax -

tax on income or wealth

ADVANTAGES of indirect taxes

Reduces quantity demanded for 'unwanted' goods
High fuel prices encourages public transport
Revenue raised can be spent on beneficial goods and services

DISADVANTAGES of indirect taxes

Some goods seen as necessities
Regressive
Discourages MNCs from investing and setting up in the UK
Firms may relocate abroad

A (specific) unit tax is

a set amount of tax per unit sold

An ad valorem tax is

a percentage tax based on the value added by the producer

A specific unit tax will shift up the supply curve by

the full amount of the tax, so that the new curve is parallel to the original one

The imposition of an ad valorem tax will shift up the supply curve by

a certain percentage, meaning that the new supply curve will not be parallel to the original

The economic incidence, or burden, of a tax indicates

the extent to which someone is made worse off by the tax.

The statutory incidence indicates

who the law says will pay the tax

SUBSIDY

An amount of money given by the government to a firm for every unit of output, in order to encourage production.

ADVANTAGES of subsidies

​Consumers pay lower prices
Encourages the production of goods that bring social benefits

DISADVANTAGES of subsidies

Cost the government and the taxpayer
Opportunity cost