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An Analysis of Indirect Taxation

...all you ever wanted to know about indirect taxes but were afraid to ask


on 27 October 2012

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Transcript of An Analysis of Indirect Taxation

Indirect taxes are defined as taxes
on goods/services
or on expenditure ...for example a $2.70 tax per pack of cigarettes
or, a 23% tax on your expenditure on shirts since production costs increase,
supply will decrease... How do you analyze an indirect tax? but since the supply curve also reflects a firm's marginal costs (MC)... ...and will thus shift left ...the MC curve will shift upwards by the amount of the tax! If they are a specific dollar/euro amount per unit of the good they are referred to as unit or specific taxes
whereas if they are percentage of expenditure they are referred to as
ad valorem Why do governments impose such taxes? ...to:
collect revenues
to lower consumption of demerit goods such as cigarettes and alcohol..
to switch consumption away from imports (tariffs) What are the consequences
of an indirect tax? Assuming typical demand and supply curves, an indirect tax will:
make the good more expensive
decrease the amount consumed and produced
create revenues for the government
also, producers will be earning lower revenues (both on a per unit basis and as a total)
...note though that consumer spending on the good may increase or decrease depending on the price elasticity of demand (...having fun??)
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