Indirect Taxation

What is direct tax?

A Tax on income

What is indirect tax?

A tax imposed by the government that increases the supply costs of producers - it is imposed on the consumption of goods and services

What is expenditure?

Anything you can spend your money on

What is tax revenue?

Revenue received by the government from the tax

What is the equation for tax revenue?

Tax per unit x quantity

What is producer revenue?

Income from sales

What is the equation for producer revenue?

Price x quantity

What is consumer tax burden?

The difference between the original market price and the new market price

What is producer tax burden?

Tax revenue minus consumer tax burden

What is specific tax?

A fixed tax per unit regardless of price

What is another name for ad valorem tax

percentage tax

What is ad valorem tax?

A tax which is a percentage of the price, the higher the price the higher the tax

2 reasons why we have taxes?

• To fund public services

• To curve the consumption of demerit goods

What is the difference between direct and indirect tax in terms of consumption?

Indirect taxes are usually collected by businesses, at the point of purchase or consumption

What are the 2 most common options that an indirect tax could be?

Specific tax or ad valorem tax

In the UK what is an excise duty?

Indirect tax levied on three major categories of goods

What are the three major categories of goods excise duties are levied on?

• Alcoholic drinks

• Tobacco products

• Road fuels

How is Ad Valorem tax usually expressed?

As a percentage

What is an Ad Valorem tax?

A tax that imposes a tax on a good or asset depending on its value

What is an example of an Ad Valorem tax?

VAT

What are 3 impacts of tax on consumers?

• Increased price therefore less is consumed

• Increased opportunity cost

• Forced to be another good/ service

What are 3 impacts of tax on producers?

• Some firms may close

• Likely to lead to reduced profits

• Workers may lose their jobs

What are 2 impacts of tax on governments?

• Improved public services

• Improved public services

What is a regressive tax?

A tax imposed by a government which takes a higher percentage of someone’s income from those on low incomes

What does regressive tax mean for someone on a lower income?

They pay more in tax relative to their income

What are 2 justifications for using indirect taxes?

• Indirect taxes such as import duties can improve a countries trade balance

• A key source of tax revenue to pay for overall government spending