The imposition of an indirect tax on a product such as a sales tax or excise duty causes the supply curve of that product to shift to the left, because when a tax is levied, the cost of supplying the products to the market increases. A smaller quantity is delivered at any price. (c) illustrate the evolution of the consumer and producer surplus resulting from indirect taxes. The following graph shows the impact on the consumer of the price increase, P to P1, multiplied by the new quantity sold, from 0 to Q1. However, the vertical distance is the tax per unit, which is greater than the price increase, so the impact on the producer is measured as the distance P to X, times 0 to Q1 – the green shaded area. The exact breakdown depends on how consumers react to a price increase, i.e. their price elasticity of demand. (a) Add an indirect flat tax to the following tables and then answer the following questions: (b) Illustrate the change in price and quantity required for each of the three products highlighted in the graphs above. a) Explain why the new supply curve is not parallel to the original curve, as is the case with a fixed tax.
Let us now examine the collection of a tax on the buyer, as shown in Figure 5.2 «Impact of a tax on the application». In this case, the buyer pays the price of the goods, p, plus tax, t. This reduces the willingness to pay for a particular unit of the tax amount, thus shifting the demand curve down by the amount of tax. First, consider a fixed tax per unit, such as a 20% gas tax. The tax could be imposed on the buyer or supplier. It is imposed on the buyer if the buyer pays a price for the goods and then also pays the tax beyond. Similarly, if the tax is imposed on the seller, the price charged to the buyer includes the tax. In the United States, sales taxes are generally imposed on the buyer — the price shown does not include the tax — while in Canada, sales tax is generally imposed on the seller. Evaluate candidates to determine the effectiveness of indirect taxes in reducing the consumption of cigarettes, alcoholic beverages, etc. The reason for this is the example given in Table 9.3. The first two columns reflect the initial situation.
Then a tax of 10 paise per unit is levied on the product in question and producers now receive a price of Re. 1 only 90 paise. Therefore, they are at the price of Re. 1 pounds now 700 units a day because they are ready to deliver when they receive 90 paise. The important point is that the distribution of a tax between the producer and the consumer depends on the elasticities of supply and demand. In Fig. 9.13(a), a larger part of the tax is passed on at a higher price than in Fig. 9.13(b). In both cases, the amount of the tax per unit is AC and the amount passed on is indicated by the distance AB. The amount passed on is greater if the demand is more inelastic.
This article uses examples to explain indirect taxes and how they differ from direct taxes. Understand why governments impose indirect taxes on various goods and services Indirect taxes on products can be levied at any stage of the supply chain, from the import of the product to the manufacturer to the retailer to the consumer. An example of this is the value added tax (VAT) common in Europe, where each level of the supply chain adds a tax and all these taxes are paid by the consumer. Thus, even a small part of the tax cannot be passed on, i.e. the market price remains unchanged. In fact, if the demand for a product is completely elastic, consumers will quickly reduce their purchase of the product to avoid the tax. In this case, the entire tax must be borne by the producers, because if they pass on a small part of it, they will lose all their customers. While this lesson focuses on the impact of indirect taxation on a good or service, it also looks at how taxes are spent and why a government imposes a tax on a good or service. Their classes must understand that when a government imposes an indirect tax on a good or service, it increases the price of the product and reduces the quantity purchased. (c) describe some of the weaknesses of indirect taxes? In this review video, we analyze the impact of indirect taxes on the level of consumer surplus. Draw three supply and demand curves in your notebooks.
These diagrams should apply to products with a different PED elasticity, such as cigarettes, used cars (uniform PED) and a voucher with elastic PED. Draw the impact of a sales tax on the good or service, including new points of balance. Be careful not to illustrate the impact of the tax by changing the demand curve rather than the supply curve. The sales tax is a regressive tax because it affects low-income people more for items such as clothing and food. For this reason, some states do not impose sales taxes on food. Using concrete examples, are you assessing the effectiveness of indirect taxes in reducing the consumption of demerit products such as tobacco, gasoline and alcohol products? [15 Markings] Relevant issues of the third review of the task could include illustrating the effects of an indirect tax on a good or service using a specific data set. Three questions on this topic could also require applicants to calculate the change in the price/quantity claimed or the amount of the consumer`s and producer`s surplus after a sales tax has been collected. Thus, it appears that the total amount of the tax was not passed on to the consumer in the form of a higher price. In this example, half of the tax was passed on to consumers, while the other half was borne by manufacturers. So, the prediction is that in the case of a normal downward demand curve and an upward descending supply curve, the price of a commodity will increase less than the amount of the tax. In other words, the burden of the tax is not fully passed on to consumers.
Instead, it is shared by both groups – buyers and sellers. One of the advantages of ad valorem taxes is that government tax revenues can automatically increase as the economy grows. This means that the tax rate does not need to be adjusted frequently, as for specific unit taxes, such as levies on cigarettes and alcohol. The effect on stakeholders is that the government benefits because its tax revenues are increased from scratch (before there is a tax) on the revenues from the new tax. As already mentioned, producers and consumers are experiencing a decline in producer surplus and consumer surplus, respectively. However, the amount of this burden and the tax burden depend on the elasticity of demand. If the price elasticity of demand (DEP) is elastic, i.e. demand reacts very strongly to a change in price, the burden of taxation falls on producers. However, if the DEP is very inelastic, i.e. the demand does not respond to a price change, then the tax burden falls on consumers.
In addition, a tax reduces the amount traded, thus reducing part of the profits of the trade. The consumer`s surplus decreases because the price for the buyer increases, and the producer`s surplus (profit) decreases because the price for the seller decreases. Some of these losses are recorded as tax, but there is one loss that is not recognized by any party – the value of the shares that would have been traded had there been no tax. The value of these units is given by demand, and the marginal cost of units is indicated by supply. The difference shaded in black in the figure is the shortfall of bargaining units that are not traded because of the tax. These lost profits from trade are called deadweight, the buyer`s values minus the seller`s costs for units that are not economically viable due to a tax or other market disturbance. In other words, deadweight is the value of the buyer minus the seller`s cost for units that cannot be traded economically solely due to a tax or other market disturbance. The net lost trading gains (measured in dollars) of these lost units are illustrated by the area of the black triangle in the figure. Discuss the impact of imposing an indirect tax on market participants, including consumers, producers and government. (d) How has VAT affected consumers and producers? Tax impact of the manufacturer.
In a scenario where supply and demand are inelastic, the tax burden falls disproportionately on suppliers. A direct tax is paid directly to the government; An indirect tax is passed on to the customer by the responsible company or agency. The best example of direct tax is income tax, both personal and corporate income tax. Tax is paid directly on the person`s or company`s income to the IRS and the state (if it has income taxes). A particular unit tax moves the supply curve up the total amount of the tax so that the new curve is parallel to the original curve, as shown. The government imposes a tax of $2 per unit, with the new delivery schedule set out in column 4. The IRS says corporate property taxes based on property value are indirect taxes, but personal property taxes are direct taxes. Indirect taxes are often levied by governments to change consumer behaviour. Some indirect taxes, called «sin taxes,» are designed to discourage certain types of activities. For example, tobacco products are addictive, so their taxation does not affect the amount of cigarettes, snuff and cigars that people buy. The federal government, states and some places tax tobacco, so the tax on a pack of cigarettes can reach 40% of the selling price. Tax impact is the effect that a particular tax has on both parties to a transaction; the producer who does the good and the consumer who buys it.