Revision on indirect taxes
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The document discusses indirect taxes and their impact on price and quantity. It shows graphs illustrating how a tax affects the supply curve. If demand is elastic (coefficient >1), suppliers bear most of the tax burden, while if demand is inelastic (<1), consumers bear most. A tax on an inelastic good or one with perfectly elastic supply results in consumers paying the full tax. An ad valorem tax causes a pivotal shift in supply as the tax percentage applies to the unit cost. Examples given are VAT and insurance premium tax.
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Revision on indirect taxes
- 2. INDIRECT TAXES Value Added Tax Plastic Bag Charge Fuel Duties Alcohol Duties Tobacco Duties Sugar Tax GOVERNMENT INTERVENTION
- 3. INDIRECT TAXES AND ELASTICITY OF DEMAND Price Quantity D1 S1 Q1 P1 GOVERNMENT INTERVENTION
- 4. INDIRECT TAXES AND ELASTICITY OF DEMAND Price Quantity D1 S1 S1 + tax Q1 P1 GOVERNMENT INTERVENTION
- 5. INDIRECT TAXES AND ELASTICITY OF DEMAND Price Quantity P2 D1 Q2 S1 Q1 P1 GOVERNMENT INTERVENTION S1 + tax
- 6. INDIRECT TAXES AND ELASTICITY OF DEMAND Price Quantity P2 D1 Q2 S1 Q1 P1 P3 GOVERNMENT INTERVENTION S1 + tax
- 7. INDIRECT TAXES AND ELASTICITY OF DEMAND Price Quantity P2 D1 Q2 S1 Q1 P1 P3 Paid by consumer GOVERNMENT INTERVENTION S1 + tax
- 8. INDIRECT TAXES AND ELASTICITY OF DEMAND Price Quantity P2 D1 Q2 S1 Q1 P1 P3 Paid by consumer Paid by supplier GOVERNMENT INTERVENTION S1 + tax
- 9. INDIRECT TAXES AND ELASTICITY OF DEMAND If the co-efficient of price elasticity of demand >1, then most of the burden of an indirect tax will be absorbed by the supplier Price Quantity P2 D1 Q2 S1 S1 + tax Q1 P1 P3 Paid by consumer Paid by supplier GOVERNMENT INTERVENTION
- 10. INDIRECT TAXES AND ELASTICITY OF DEMAND If the co-efficient of price elasticity of demand >1, then most of the burden of an indirect tax will be absorbed by the supplier Price Quantity P2 D1 Q2 S1 S1 + tax Q1 P1 P3 Paid by consumer Paid by supplier If the co-efficient of price elasticity of demand <1, most of an indirect tax can be passed on to the final consumer Price P2 Demand P1 Q2 S1 S1 + tax Q1 P3 Paid by consumer Paid by supplier Tax Per Unit Quantity GOVERNMENT INTERVENTION
- 11. INDIRECT TAXES AND ELASTICITY OF DEMAND Price P2 Demand P1 Q1 S1 S1 + tax Total tax paid by the consumer Perfectly Inelastic Demand All of the tax is paid by the consumer Quantity GOVERNMENT INTERVENTION
- 12. INDIRECT TAXES AND ELASTICITY OF DEMAND Price P2 Demand P1 Q1 S1 S1 + tax Price Demand S1 S1 + tax Q1Q2 P2 P1 Total tax paid by the consumer Perfectly Inelastic Demand All of the tax is paid by the consumer Perfectly Elastic Supply All of the tax is paid by the consumer Tax Per Unit To ensure that suppliers receive the required minimum price after an indirect tax, the market price must rise by the full amount of the tax. QuantityQuantity GOVERNMENT INTERVENTION
- 13. AD VALOREM TAXES What is the effect of an ad valorem tax? The effect of an ad valorem tax is to cause a pivotal shift 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 GOVERNMENT INTERVENTION
- 14. AD VALOREM TAXES Value Added Tax (the standard rate in the UK is 20%) is an ad valorem tax. Quantity P2 Demand P1 Q2 S1 S1 + tax Q1 Price Tax Per Unit VAT Insurance Premium Tax Insurance Premium Tax is a tax on general insurance premiums. There are two rate bands, the standard rate of 9.5%, and a higher rate of 20% which applies to travel insurance, appliance insurance and some car insurance. GOVERNMENT INTERVENTION