1.2.9: Indirect taxes and subsidies

• Indirect tax: A tax on expenditure where the person who is ultimately charged is not the one responsible for paying to the government. This is because the business is required to pay, but passes the cost to the consumer
• The two types of indirect taxes are:

  Ad Valorem tax: Where the tax increases in proportion to the value of the good e.g VAT

  Specific tax: Where an amount is added to the price, increasing with amount bought e.g 59p per litre of fuel
• The incidence of tax is the tax burden on the taxpayer
• If PED is perfectly elastic or PES is perfectly inelastic, supplier pays all the tax, but if PED is perfectly inelastic or PES is perfectly elastic, the consumer pays all the tax
• The more elastic the demand curve, or the more inelastic the supply curve, the more the supplier must pay in tax
• The more inelastic the demand curve, the higher tax revenue there is for the government as demand can fall less, so more tax must be paid
• Subsidy: A grant given by the government to encourage more production or consumption
• A subsidy causes an increase in supply as costs of production are decreased