Indirect taxes and subsidies

							Indirect taxes and subsidies


            Chapter 12
Ad Valorem Tax
 This is a tax based
 on value or price.
 So the higher the
 price the higher the
 tax.
Specific or unit tax
 This tax is based
 on the quantity
 sold. That is why it
 is per unit, not
 based on the
 value.
Calculating government revenue

 Cigarettes are £5 per packet. 50% of
 that is tax. Draw a supply and
 demand curve for cigarettes showing
 the government revenue.
VAT and excise duties

 Indirect taxes.
 VAT – ad valorem tax (according to
 the value)
 Excise tax – specific or per unit tax
Subsidy

 A subsidy is the opposite of a tax
 used by the government to encourage
 certain industries and products. A
 subsidy has the effect of shifting the
 supply curve to the right.
The product below (corn) receives a
generous government subsidy.
Show the effect on the diagram.
Why would a government subsidise
a product?
Why would a government subsidise
a product?
 Protect jobs
 Win votes
 Good for the environment
 Improves people‘s health
 Protect a lifestyle (farming, fishing)
Incidence of tax

 Burden of tax – who carries the
 burden of the tax.
Elastic and Inelastic goods

 Inelastic goods – the incidence of the
 tax falls on the consumer. Cigarettes
 are inelastic. If the government
 imposed a 1 chf specific tax on a
 packet of cigarettes, who would carry
 the burden – the smokers or the
 cigarette companies?
VAT increase in the UK.
Be aware of the following fact.

 The UK VAT rate is increasing from
 17.5% to 20%. How will that affect…
 A) television salesmen
 B) women‘s boutique
 C) publicans
 D) the manager of a luxury spa