Indirect Tax

• Indirect taxes are a form of government intervention used in microeconomics to raise revenue and solve market failure.
• Examples of indirect taxes include VAT, cigarette duty, alcohol duty, fuel duties, sugar tax, carbon tax, fat taxes, and others.
• The two general types of taxes that governments can use are indirect taxes and direct taxes.
• Direct taxes are taxes on income that can't be transferred to anybody else, such as income tax, national insurance, corporation tax.
• Indirect taxes are expenditure taxes that are added when goods and services are sold, increasing the cost of production for firms but can be transferred to consumers via higher prices.
• Indirect taxes can be specific, like wine duty or alcohol duty, which taxes per unit, or ad valorem, which is a tax on the value of the goods.
• Specific indirect taxes shift the supply curve parallel to S1 plus tax, as the vertical distance between the two supply curves represents the value of the tax.
• Workers could lose their jobs due to indirect taxes as labor is a derived demand and with quantity falling there is less need for workers to produce.
• Indirect taxes are highly regressive, taking a larger proportion of the income of low-income households and leaving high-income households unaffected.
• An indirect tax creates a deadweight loss and has implications for consumers, producers, workers, and the government.
• A deadweight loss can be created from indirect taxes.
• Producers are burdened by indirect taxes as they lower producer revenue and producer surplus.
• Government intervenes to reduce quantity in the market, causing a deadweight welfare loss.
• Consumers are burdened by indirect taxes as they raise price, lower consumer surplus, and reduce quantity and choice.
• Producer revenue falls due to indirect taxes.
• The government might like indirect taxes as they raise revenue and solve key market failures, but they are not going to like the unintended consequences such as harm to consumers, aggressive nature of the tax, harm to producers, and potential creation of black markets.
• The supply curve will shift pivoted from s1 to s1 plus tax if a specific tax is implemented.
• The producer burden is the amount of tax that producers are paying.
• With the indirect tax implemented, producers are charging p2 and selling q2, but a lot of that area is actually going to the government via government revenue, so producer revenue is only eec q20.
• The vertical distance between the two supply curves represents the value of the tax in a specific tax.
• An indirect tax will increase cost of production for firms, causing the supply curve to shift to the left.
• The difference in price portion of the government revenue box is always the consumer burden.
• A specific tax is a tax per unit, while an ad valorem tax is a tax as a percentage of the price being charged.
• The amount of government revenue collected can be calculated by multiplying the vertical distance between the two supply curves by all the units being produced and sold.
• The equation for revenue is just price times quantity, so initially without the indirect tax, producer revenue is just p1 times q1, giving us the area p1 a q10.
• The consumer burden is the amount of tax that consumers are paying.
• The vertical distance between the two supply curves represents the tax per unit in an indirect tax.