<INDIRECT TAXES>

--THINK AHEAD--

"Apparantly 2x Kid's football jerseys cost only SGD 164.82, BUT I had to pay a total of SGD 178.00, what is going on, was I ripped off?", "Study the following receipt and explain the extra charge!"

"...that's right, in Singapore they impose a 'Value Added Tax' (VAT) of '8%', on each sale, which is a type of 'indirect consumption tax' that you only pay when you purchase something." "Do you know why it's called 'indirect'?" and "Is 8% considered high or low?"

--TASK--

"To find out whether this is a high rate, and also to find other types of indirect tax, go to this website HERE, and find the GST for your country as well as '2 more 'indirect' taxes paid for by your citizens, then pin it to the padlet below.", "Can you see why HK is considered a 'shopper's paradise'?"

--DEFINITION--

INDIRECT TAXES are taxes levied on goods, services, or transactions, rather than directly on an individual's income or wealth. The tax eventually finds its way to the government via a third party (usually a business or seller) who included part (or all) the tax in the selling price, hence it went 'indirectly' to the government.

--WHY TAX?--

1) PROVIDE GOVERNMENT REVENUE

1) PROVIDE GOVERNMENT REVENUE: Indirect taxes are collected by the government in order to finance their spending. This can help REDISTRIBUTE INCOME from the rich to the poor, especially if the taxes are on luxury goods (See 'Luxury tax')

2) REDUCE CONSUMPTION OF DEMERIT GOODS

2) REDUCE CONSUMPTION OF DEMERIT GOODS: Indirect taxes on goods that are harmful to society when CONSUMED (e.g. cigarettes and alcohol) can be used to increase the costs and price of these goods so the quantity demanded will decrease.

3) REDUCE THE PRODUCTION OF DEMERIT GOODS:

3) REDUCE THE PRODUCTION OF DEMERIT GOODS: Indirect taxes on goods that are harmful to society when PRODUCED (e.g. Energy produced from burning fossil fuels which create pollution) can be used to RAISE the costs of production of these producers and reduce output.

4) REDUCE THE QUANTITY OF IMPORTS

4) REDUCE THE QUANTITY OF IMPORTS: Indirect taxes can be used to raise the price of imported goods, so consumers will buy more domestically produced substitutes in order to save jobs.

--TYPES--

SPECIFIC TAX

SPECIFIC TAX: This refers to a UNIT TAX, in which a SPECIFIC FIXED AMOUNT OF TAX is imposed on top of the selling price of each unit of a good sold e.g a tax of $2 per pack of cigarettes sold.

AD VALOREM

AD VALOREM TAX: This refers to a PERCENTAGE TAX, in which a SPECIFIC FIXED % OF TAX is imposed on the selling price of each unit of a good sold e.g a tax of 2% per pack of cigarettes sold.

--MARKET IMPACTS--

--HIGHER LEVEL ONLY--

--CALCULATION OF MARKET IMPACTS--

--WELFARE IMPACTS--

--TAX BURDEN/INCIDENCE--

--DEFINITION--

TAX BURDEN: refers to the TOTAL AMOUNT OF TAX PAID. It is equal to the (PRICE PAID BY THE CONSUMER - THE PRICE RECEIVED BY THE PRODUCER) * OUTPUT.
CONSUMER TAX BURDEN: Refers to the PORTION of the tax burden PAID BY THE CONSUMER. It is equal to the CHANGE IN PRICE PAID * OUTPUT.
PRODUCER TAX BURDEN: Refers to the PORTION of the tax burden PAID BY THE PRODUCER. It is equal to the CHANGE IN PRICE RECEIVED * OUTPUT.

--THINK AHEAD--

"If the government decided to impose a tax on every pack of cigarettes sold by $20, do you think the price of a pack of cigarettes would go up by $20?" "Yes ,No, Maybe!, Why?"

--HIGHER LEVEL ONLY--

--TAX BURDEN & ELASTICITY--

"Take a look at this diagram. What do you notice about the relative size of the consumer and producer burdens and the relative sizes of the PED and PES?", "What do you notice about the burden when PED/PES = 1?", "What about the burden when PES or PED = 0?"

--RATIONALE--

--PES & PRODUCER BURDEN--

"The tax decreases the price, recieved by the producer therefore the size of the producer burden will depend on 'how quickly the producer can reallocate their resources to the production of another good (The size of the fall in Qs)' and 'avoid' the tax. In other words the more elastic the supply the greater the ability to avoid paying the tax and vice versa."

--INELASTIC--

"Not very quickly!": When supply is inelastic producers can not easily reduce supply and have to accept lower prices as their factors are immobile and they can't reallocate them elsewhere and therefore 'Absorb MORE of the burden'.

--ELASTIC--

"Relatively quickly!": When supply is more elastic, when the price received falls, they are able to reduce supply significantly and reallocate resources elsewhere. So 'Absorb LESS of the burden'.
RWE EXAMPLE 🌏: Coca-Cola has not found it too difficult to avoid the sugar tax, as it has a very elastic supply curve for its regular coke. and can shift its resources easily into producing the 'sugar-free' variation.

--PED & CONSUMER BURDEN--

""The tax increases the price for the customer, therefore the consumer burden will depend on 'how quickly the customer can find a substitute and 'avoid' the tax'. In other words the more elastic the demand the greater the ability to avoid paying the tax and vice versa."

--INELASTIC--

"Not very quickly!" When demand is inelastic, consumers have to accept higher prices as no alternatives exist; as such the rise in price can be passed onto consumers more easily. Therefore 'consumers absorb MORE of the burden'.

--ELASTIC--

"Relatively quickly!" When demand is elastic, consumers do not have to accept higher prices, as many alternatives exist; as such, the rise in price can not easily be passed onto consumers. So 'consumers absorb LESS of the burden'.

--'HELPFUL TIP!'--

To work out how the burden is apportioned ask yourself:

"Do consumers require a very large price increase to lower their quantity demanded. relative to whether producers require a small decrease in price to lower their quantity supplied?" "If the answer is 'Yes', then they will share most of the burden, and vice versa."

--TASK 1--

"Explain why a tax on hotels would lead to a very large producer burden, whilst a tax on cigarettes would mainly create a consumer burden", "In your answer sketch the market diagrams of both showing the relative elasticities and burdens.

WELFARE IMPACTS

ADD COKE TO DIET COKE EXAMPLE, USE MRU WORDING

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