Taxes (part 1)

Direct Taxes

• Income tax
• Wealth tax

Both of these Taxes affect the demand curve.

You can also have direct taxes on suppliers company tax, which would affect the supply curve. ( It would affect elasticity though, it would only shift the curve.)

Indirect taxes

These are taxes where government takes the money once you have done something (other than just earn money) e.g. Once you buy a good, there might be a tax on it.

• Ad Volorem (VAT), value added tax
• Specific, Excise or Unit taxes

Excise tax

(.75-1.0 is what the producer pays and 1.0-1.25 is what the consumer pays)

If the demand is more elastic in this graph, producer pays more, but when the demand is inelastic, consumer pays.

A problem with excise tax, is that often they seen unfair, so smuggling occurs, if the tax is too high, besides this, tax evasion can be noticed too.

These taxes are not charged in duty-free, in airports, so ones who travel avoid them.

Value Added Tax (VAT)

VAT is a percentage tax on the volume of goods sold, so in UK people usually pay 17.5% on most items (15% now)

Why do governments tax?

1. To get a revenue, might damage demand or supply. It may encourage excess demand, because suppliers supply less than people want. From that, black market, queues, shortages and tax avoidance is derived.
2. If it wishes people to stop using a good
3. To compensate for the 'true' cost of an activity.

How elasticity affects tax?

1. If demand is price elastic, suppliers will pay more tax
2. If demand is inelastic, the government can raise a great deal of revenue

Governments also worry about tax being regressive, proportionate or progressive.

• Proportionate tax- same tax for everybody
• Regressive tax- Tax that affects poor more than the rich
• Progressive tax- Is when more is taken from the rich, rather than the poor

Why have subsidies?

A subsidy is the opposite of the tax, to reduce unit cost. A purpose of a subsidy is to encourage production or it is given in an emergency. It can be 'hidden' as a regulation or tax rule that favors national companies.