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Indirect taxes
and subsidies
Taxes and Subsidies
An
indirect tax is….
A subsidy is….
How do we show taxes and
subsidies on diagrams
Taxes
and subsidies affect the
supply curve of a diagram. A
tax shifts the supply curve to
the left, a subsidy shifts the
supply curve to the right.
Ad Valorem Tax
This
is a tax levied as
a percentage of the
value or price of the
good. 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.
Cigarettes, alcohol
and petrol are all
subject to both an ad
valorem tax and a
specific tax.
Is anything free from VAT?
Is anything free from VAT?
 Most
food, not crisps, icecream, soft
drinks and restaurant meals.
 Education and educational books.
 Animal feeds – if the animals are
ultimately for human consumption –
but not cat food and dog food.
 Health products.
 Gambling
 Newspapers
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.
 Excise
duty – a tax placed on a good in
addition to the basic VAT. Cigarettes,
alcohol and petrol are the three lucky
recipients of excise duties.
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?
 Public
bus company
 Beef farmers
 Public broadcasting
 Solar energy
 Regional airport
 Biofuels
Why would a government
subsidise a product?
 Protect
jobs
 Win votes
 Good for the environment
 Improves people`s health
 Protect a lifestyle (farming, fishing)
 Culturally important
 National prestige (many African countries
subsidise their airlines).
Incidence of tax
 Incidence
of tax – who carries the burden
of the tax.
 Or – Tax incidence is a measure of the
consequences of a tax on all the affected
parties.
Incidence of tax in a
diagram.
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
Sugar in soft drink
Sugar CONSUMPTION IN
THE UK
 In
the last two decades, British sugar
consumption has increased by 31%, to
1.25lb per person per week. Though fewer
and fewer of us take sugar in our tea, and
sprinkle less over our cereals and
puddings, we are actually consuming
more.
In
order to combat
obesity, indirect taxes
should be placed on
sugary foods. Discuss the
economic implications of
this. You may use a
diagrams in your answer.
(14)
Economic Effects:Think BIG
 Businesses
 Individuals
 Governments
Question 1
 Draw
and label a supply and demand
diagram with a specific tax on a good
with a price inelastic demand. (6)