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Post Your Responses to the right side of the task

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Post Your Responses to the right side of the task

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Post Your Responses to the right side of the task

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Post Your Responses to the right side of the task

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10 Minute Timer - Calm Music for Relaxing

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(1) Research the tax (2) write a short paragraph explaining it – where is it imposed, what is it charged on, how much is it? (3)  Add another paragraph setting out the pros and cons of the tax – has it been successful in achieving its aims?

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Read p.117-20 of the course companion Edexcel Theme 1 Study Companion.pdf on indirect taxes. Then assess the tax that they chose against the list of evaluative points on p.120.

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If time allows, this video may be of interest https://www.tutor2u.net/economics/reference/indirect-taxes-2021-revision-update or you could carry out research in preparation for the Bank of England visit on Wednesday (but this must be focused research and not just reading random articles!).

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This revision resource focuses on the economics of indirect taxes.

Indirect Taxes as a form of Government Intervention in Markets

An indirect tax is a tax imposed by the government that increases the supply costs of producers. The amount of the tax is always shown by the vertical distance between the pre- and post-tax supply curves. Because of the tax, less can be supplied to the market at each price level.

What are excise duties?

Excise duties in the UK are indirect taxes levied on three major categories of goods - alcoholic drinks, tobacco products and road fuels. Generally, excise duties are charged a flat (or specific) rate: a certain number of pence per pint, per litre, per packet - though tobacco is subject to an additional ad valorem tax.

What are the main indirect taxes in the UK?

Air Passenger Duty

Alcohol duties

Betting, gaming and lottery duties

Carbon Price Floor

Insurance Premium Tax

Landfill Tax

Soft Drinks Industry Levy

Tobacco duties

Value Added Tax

Value Added Tax

In 2019/20, £134 billion was raised from VAT in the UK although this is expected to fall in 2020 because of the recession

Standard rate is 20% - applies to most goods and services

Reduced rate is 5% - applies to some goods and services such as children's car seats and home energy

Zero rate is 0% - Zero-rated goods and services include most food and children's clothes and - from January 2021 - women's sanitary products

There are around 2.3 million VAT-registered businesses in the UK, with around 3.6 million unregistered. A business needs an annual revenue in excess of £85,000 a year to be liable to pay value added tax.

Indirect Taxes - 2021 Revision Update I A Level and IB Economics

Indirect tax analysis diagram

How do we show the burden of an indirect tax?

Indirect Taxes - Key Analysis Diagrams I A-Level and IB Economics

How does an ad valorem indirect tax differ from a specific tax?

An ad valorem tax imposes a tax on a good or asset, depending on its value. The tax is usually expressed as a percentage. For example, in the UK, VAT is charged at 20% on most goods offered for sale.

Examples of ad valorem taxes in the UK (January 2021)

Value Added Tax - main rate is 20%

Insurance Premium Tax

A tax on general insurance premiums, including car insurance, home insurance, and pet insurance

Main tax rate is 12%

Stamp Duty Land Tax (SDLT)

£0 - £500,000 - no stamp duty

Next £425,000 (the portion from £500,001 to £925,000) taxed @ 5%

Next £575,000 (the portion from £925,001 to £1.5 million) taxed @10%

Remaining amount (the portion above £1.5 million) taxed @ 12%

Indirect Taxes - Ad Valorem Taxes I A-Level and IB Economics

What are the main justifications for governments to intervene using indirect taxes?

1. A key source of tax revenue to pay for overall government spending

2. Can be used to change consumer and producer behaviour such as the sugar tax or carbon taxes - this might alter the pattern of demand for goods and services

3. Helps to address examples of market failure - an example is the landfill tax (to encourage recycling) and the sugar tax to combat diabetes and control health costs

4. Indirect taxes such as import duties can be used to improve a country's trade balance

What impact do indirect taxes have on the level of income inequality?

A regressive tax is a tax imposed by a government which takes a higher percentage of someone's income from those on low incomes. This means that those with lower incomes pay more in tax relative to their income.

If we look at indirect taxes paid as a share of household disposable income, then they are regressive

The highest percentage is paid by families in the poorest quintile of the income distribution

However, indirect taxes measured as a share of household spending shows a broadly proportional impact

Key Revision Points for Indirect Taxes

1. Who pays the tax? How much can the supplier pass on to the final consumer?

2. What impact does an indirect tax have on quantity bought?

3. How much tax revenue is raised?

4. How is the tax revenue used?

5. What are the consequences for inequality?

6. Are there any unintended consequences of introducing a new indirect tax?

Indirect Taxes - Key Evaluation Arguments I A Level and IB Economics

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This revision resource focuses on the economics of indirect taxes. An indirect tax is a tax imposed by the government that increases the supply costs of producers. The amount of the tax is always shown by the vertical distance between the pre- and post-tax supply curves.

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A service tax is when the service provider pays direct tax and recovers this money lost from the customer. The UK’s service tax is 2% (March 2021). For example, there is service tax on restaurant bills, hotels, air travel and other means of transport. According to the Service Tax in the Finance Act of 1994, a person paying service tax may be the service provider or the consumer. It is an indirect tax, where the service provider collects the tax on services from the customer and then pays it to the government.  This tax, at 2%, can be inexpensive, therefore it is somewhat affordable to all customers. It also benefits the economy and government as this tax leads to sustaining multiple services. However sometimes there is no differentiation between goods tax and services tax, leading to increased overall tax.

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Sales tax is an indirect tax which is collected by the retailer after the final sale in the supply chain, this means that the end consumers pay sales tax when they purchase the good or service. Resellers issue tax exemption certificates to the vendor so that they are not liable to pay sales tax when buying supplies or materials that will be resold. Therefore, sales tax is not collected until the sale is made to the final consumer. Generally, the seller is responsible to collect the tax and remit it to the appropriate tax authority. Sales tax in the UK is 20% and is often paid on goods such as clothes.

Sales tax is used to raise tax revenue for government which can be used to fund public services, education, healthcare, defence and infrastructure all of which should benefit society. However, sales tax increases prices making it more expensive for people on a lower income this could potentially reduce consumption as less people can afford goods and services. It could also affect competitiveness as businesses prices are higher so consumers may look elsewhere.

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Customs import tax

Customs duty refers to the tax imposed on goods when they are transported across international borders. In simple terms, it is the tax that is levied on import and export of goods. The government uses this duty to raise its revenues, safeguard domestic industries, and regulate movement of goods. The key difference between taxes and duties is that duties are a type of tax on goods entering or leaving a country, while taxes are charges placed on almost all purchases. Both contribute to the total import and export costs of a product.

Octroi duty is the tax levied by local or state governments on certain categories of goods as they enter the area. It is a charge for allowing transit of good through the jurisdiction. As of 1 July 2017, with the introduction of GST country-wide, the octroi has been abolished.

Pros:

A customs duty is a levy imposed on imported or exported goods. This is a form of tax, and is typically calculated based on the value of the goods being imported or exported, or some other measure, such as its weight or cubic volume. A customs duty is usually imposed in order to provide revenue for a government, though it may also be imposed in order to protect a domestic industry from lower-priced goods coming into the country. Customs duties are especially effective when used to counteract predatory
pricing on goods being imported from outside the country.

Cons:

The primary negative impact of customs duties is on the buyers in the country into which goods are being imported. Assuming that the duty is passed through to the price paid by the buyers, they are indirectly paying the duty to their own government. Customs duties also reduce the competitiveness of products within a country, since they reduce the price pressure on competitors within the country, resulting in less need to be more efficient.

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sales tax is a tax paid on certain sales of goods and services to a governing body by the final consumer . laws usually allow the seller to collect for the tax from the consumer at the point of purchase. it varies from 5-28% depending on the services or goods category. its is charged on sales of tangible personal property.

sales tax has a pro of being simple and fair as everyone pays the same price to buy a product therefore citizens are not required to maintain any detailed records. it is also elastic s it is irrespective of income as the tax is imposed only on people who buy a particular product. however it is uneconomical as it isn't a easy job therefore the government has to have a team of administrative people to manage it effectively. as well as being harmful for industries as it increases the burden on manufacturing industries as it discouraging due to the high cost of production and less profit.

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custom duty tax is a tax imposed on cross-border goods that are collected by customs. Its determined on things such as the value, what good it is, and international trade agreements. It is not imposed on everything, only goods worth over £135 and exise goods (negative products such as alcohol and tobacco).
One benefit of this tax is it brings money to the country from other people sending goods from outside the UK that can be put towards making border control safer and higher security systems to products being sent into the UK.
A drawback is it weakens the competitiveness of an economy as less people are encouraged to send goods into the UK and causing people to settle for inferior goods.

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Custom duty and octroi tax is a tax that is imposed on goods when they are transported across international borders and are collected by customers as government revenue. This means the tax is on good and services entering or leaving the country while other taxes are places on all purchases. Duty taxes are put onto imports and exports to protect the countries economy by helping to controlling the flow of goods, especially restrictive goods. The import duty rate in the UK is no charge for £135< and for items 135> there is a 2.5% tax.  Some disadvantages of Customs tax is that these taxes may weaken the economy's competitiveness which may force people to settle for more inferior goods. However an advantage is that it allows the government to increase their revenue, it also helps to reduce fraudulent activities and the circulation of black money.