Indirect taxes - notes

1. Indirect
Taxes
EdExcel
Economics
1.2.9

2. Indirect
Taxes
in
Markets
• An
indirect
tax
is
a
tax
imposed
by
the
government
that
increases
the
supply
costs
faced
by
producers.
• The
amount
of
the
tax
is
always
shown
by
the
ver7cal
distance
between
the
two
supply
curves.
• Because
of
the
tax,
less
can
be
supplied
at
each
price
level.
• The
result
is
an
increase
in
the
market
price
and
a
contracBon
in
demand
to
a
new
equilibrium
output.
1. A
specific
tax
is
a
set
tax
per
unit
e.g.
a
£5
tax
per
unit
sold.
2. An
ad
valorem
tax
is
a
percentage
tax
e.g.
20%
on
the
unit
price.
• The
main
UK
indirect
tax
is
VAT
-­‐
generaBng
£110bn
annual
tax
• Fuel
du7es
generate
£27bn
and
tobacco
taxes
£10bn
each
year
• Taxes
such
as
air
passenger
duty
bring
in
£3bn
of
tax
each
year
Exam
Tip:
Use
clear
analysis
diagrams
to
show
the
impact
of
an
indirect
tax

3. Examples
of
Indirect
Taxes
in
the
UK
Economy
VAT
Landfill
Tax
Fuel
DuBes
Alcohol
DuBes
Tobacco
DuBes
Air
Passenger
Duty
Standard
rate
=
20%
£80
per
tonne
for
waste
Taxed
at
58p
per
litre
Bands
based
on
distance
£3.76
per
pack
+
17%
VAT
Beer
tax
=
41.5p
per
pint

4. UK
Tax
Revenues
from
Value
Added
Tax
0
20000
40000
60000
80000
100000
120000
00/01
01/02
02/03
03/04
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12
12/13
13/14
VAT
receipts
in
£
million

5. Indirect
Tax
When
PED
=
0
and
PES
=
infinity
Price
Qty
P2
Demand
P1
Q1
S1
S1
+
tax
Total
Tax
Revenue
(paid
by
the
consumer)
Price
Qty
Demand
S1
S1
+
tax
Q1
Q2
P2
P1
Total
tax
paid
by
the
consumer
Perfectly
Inelas7c
Demand
All
of
the
tax
is
paid
by
the
consumer
Perfectly
Elas7c
Supply
All
of
the
tax
is
paid
by
the
consumer
Tax
Per
Unit
To
ensure
that
suppliers
receive
the
required
minimum
price
a_er
an
indirect
tax,
the
market
price
must
rise
by
the
full
amount
of
the
tax.

6. Indirect
Taxes
with
Different
Coefficient
of
PED
If
the
co-­‐efficient
of
price
elas7city
of
demand
>1,
then
most
of
the
burden
of
an
indirect
tax
will
be
absorbed
by
the
supplier
Price
Qty
P2
D
Q2
S1
S1
+
tax
Q1
P1
P3
Paid
by
consumer
Paid
by
supplier
If
the
co-­‐efficient
of
price
elas7city
of
demand
<1,
most
of
an
indirect
tax
can
be
passed
on
to
the
final
consumer
Price
Qty
P2
Demand
P1
Q2
S1
S1
+
tax
Q1
P3
Paid
by
consumer
Paid
by
supplier
Tax
Per
Unit

7. Ad
Valorem
(Indirect)
Taxes
Value
added
tax
(standard
rate
in
the
UK
is
20%)
is
an
example
of
an
ad
valorem
tax.
QuanBty
P2
Demand
P1
Q2
S1
S1
+
tax
Q1
Price
• The
effect
of
an
ad
valorem
tax
is
to
cause
a
pivotal
shi_
in
the
supply
curve
• This
is
because
the
tax
is
a
percentage
of
the
unit
cost
of
supplying
the
product.
• So
a
good
that
could
be
supplied
for
a
cost
of
£50
will
now
cost
£60
when
VAT
of
20%
is
applied
• A
different
good
that
costs
£400
to
supply
will
now
cost
£470
when
the
same
rate
of
VAT
is
applied
• The
absolute
amount
of
the
tax
will
go
up
as
the
market
price
increases
Tax
Per
Unit

8. Evalua7on
Arguments
when
Assessing
Indirect
Taxes
• Effect
of
a
tax
depends
in
part
on
coefficient
of
elasBcity
of
demand
• Problems
in
sedng
the
tax
rate
at
the
right
level
to
achieve
aims
• Are
there
unintended
consequences
from
a
tax?
EffecBveness
of
a
tax
and
unintended
consequences
• Does
an
indirect
tax
generate
substanBal
tax
revenues?
• How
is
the
tax
revenue
used
–
perhaps
for
parBcular
projects?
How
much
tax
revenue
is
raised?
How
is
it
used?
• Might
there
be
a
possible
loss
of
jobs
and/or
capital
investment?
• Will
an
indirect
tax
negaBvely
affect
compeBBveness
and
trade?
What
is
the
impact
on
businesses
/
compeBBveness?
• Who
are
the
main
winners
and
losers?
• Does
a
tax
have
a
regressive
effect
on
lower
income
groups?
Consequences
for
equity
/
the
distribuBon
of
income

9. Indirect
Taxes
EdExcel
Economics
1.2.9