indirect tax +

• Indirect taxes


  A form of government intervention used in microeconomics for two core reasons: 1) to raise government revenue, 2) to solve market failure by reducing consumption and production of harmful goods and services
• Types of taxes governments can use


  • Indirect taxes
  • Direct taxes
• Direct taxes


  Taxes on income that can't be transferred to anybody else, e.g. income tax, national insurance, corporation tax
• Indirect taxes


  Expenditure taxes - an extra charge when goods and services are sold that increases cost of production for firms, but can be transferred to consumers via higher prices
• Specific indirect tax


  A tax per unit, e.g. wine duty or alcohol duty
• Impact of specific indirect tax on supply curve


  1. Supply curve shifts upwards and parallel from S1 to S1 plus tax

  2. Vertical distance between supply curves represents the tax per unit
• Ad valorem tax


  A tax as a percentage of the price being charged
• Impact of ad valorem tax on supply curve

  1. Supply curve shifts upwards and pivots from S1 to S1 plus tax

  2. Vertical distance between supply curves represents the percentage tax
• Impacts of indirect tax on market


  1. Supply curve shifts upwards from S1 to S1 plus tax

  2. Price increases from P1 to P2

  3. Quantity decreases from Q1 to Q2
• Government revenue from indirect tax


  Vertical distance between supply curves (tax per unit) multiplied by quantity sold (up to Q2)
• Consumer burden


  Portion of government revenue that comes from the difference in price (P2 - P1)
• Producer burden


  Portion of government revenue that comes from the reduction in producer revenue
• Producer revenue


  Price times quantity, minus the government revenue portion
• Indirect taxes create a deadweight welfare loss
• Impacts on stakeholders


  • Consumers dislike indirect taxes as they raise prices, lower quantity and choice, and are regressive
  • Producers and workers dislike indirect taxes as they reduce producer revenue and surplus, and may lead to job losses
  • Governments like indirect taxes as they raise revenue and can solve market failures, but dislike unintended consequences like black markets and deadweight loss
• The impacts of indirect taxes can vary depending on elasticity of demand