Indirect taxation (ad valorem and specific)

• What are taxes?

  Money the government receives from purchases, consumers and producers.
• What are the two types of taxes?

  Direct and indirect taxes.
• What are the two types of indirect taxes?

  . Specific

  . Ad Valorem
• What are examples of specific taxes?

  Income tax

  Sales tax

  Property tax

  Excise tax

  Capital gains tax

  Duties tax

  Sugar tax
• What are examples of ad valorem tax?

  Property tax

  Sales tax

  Import tariffs

  VAT
• What is meant by specific tax?

  A per unit tax - more tax is paid the higher the amount or volume of the goods purchased.
• What is meant by ad valorem tax?

  Percentage tax
• What is the purpose of tax?

  . Discourage consumption of de-merit goods.

  . Government revenue - NHS, defence, education

  . Tariff - stop foreign imports
• What does tax cause?

  . prices to increase

  . quantity demanded to decrease

  . shift to the left in supply
• What is the incidence of tax on the consumer?

  The incidence of tax per unit on the consumer is the difference between the original equilibrium price and the new equilibrium price following the introduction of a tax.
• What is the incidence of tax on the producer?

  The incidence of tax per unit on the producer is the difference between the tax and the incidence of tax on the consumer.
• What will the producer do if a good or service in elastic?

  The producer will absorb the tax as consumers are sensitive to price.
• What will producers do if a good or service is inelastic?

  The producer will pass the tax onto consumers because consumers will purchase the good or service at any price.
• What is the problem with tax?

  . winners an losers - inequality gap increases

  . higher prices aren’t affordable for lower income households

  . government doesn’t always spend the money wisely
• What does the Ad Valorem diagram look like?

  DIAGRAM BELOW:

  
• What does the specific tax diagram look like?

  DIAGRAM BELOW: