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--3.2.1 IMPACT & INCIDENCE OF INDIRECT TAXES--
--3.2.1 IMPACT & INCIDENCE OF INDIRECT TAXES--
--THINK AHEAD--
"2x Kid's football jerseys cost only SGD 164.82, yet 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!"
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"...that's right, in Singapore they impose a 'GENERAL SALES TAX (GST) 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?"
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--DEFINITION--
"INDIRECT UNIT TAXES are taxes levied on goods, services, or transactions. It is called 'INDIRECT' because the payment is paid via a 3rd party (usually the producer) rather than directly from the consumer to the government."
CONSUMER → PRODUCER → GOVERNMENT
"Of course, the producer does not wish to pay this extra themselves and so includes part (as much as possible) of the tax in the selling price."
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"Given this definition, it is clearly an additional COST OF PRODUCTION, which, as we know, REDUCES THE WILLINGNESS TO SUPPLY at each price level, causing a LEFTWARD SHIFT IN THE SUPPLY CURVE.
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"As mentioned in the definition, the tax is included in the selling price so what happens to the price the consumer pays?"
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"That's right, the price the consumer pays increases..."
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"...and if after selling it at the higher price, the seller has to give the tax to the government, what happens to the amount of money they actually receive after tax?"
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"That's right, 'after-tax' the price the seller actually receives decreases..."
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"So if we return to our laws of demand and supply, we should realise that: an indirect tax leads to a contraction in both the quantity demanded and supplied, via a higher price for the consumer and a lower price for the producer."
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--TASK--
"Sketch the diagram below."
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--TASK--
"Now indicate the following..."
1) "The tax paid to the government per unit."
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That's right, it's the vertical gap between the two prices."
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--TASK--
"Next indicate...
2) "The total subsidy paid by the government."
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"That's right, THE TOTAL TAX INCIDENCE (amount of 'TAX REVENUE' earned by the government) is equal to the tax paid per unit (UNIT TAX) MULTIPLIED BY THE NEW QUANTITY."
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--TASK--
"Next indicate...
3) "The amount of tax paid by the consumer."
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"You should have seen that in our example the tax incidence is 'shared' between the consumer (this is called the CONSUMER TAX INCIDENCE/BURDEN) and the producer (this is called the PRODUCER TAX INCIDENCE/BURDEN), with the upper portion being paid by the consumer (equal to the difference between the original price piad and the after-tax higher price paid * quantity transacted)."
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--TASK--
"Next indicate..."
4) "The amount of tax paid by the producer."
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"...so the lower portion of the incidence must be paid by the producer (equal to the difference between the original price received and the after-tax price received * quantity transacted)."
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--TASK--
"Next indicate..."
5) "After-tax revenue earned by the producer."
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"...the after-tax money earned by the producer is equal to the after-tax price they receive * the quantity transacted..."
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--TASK--
"Finally indicate"...
6) "The change in total revenue."
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"Here is the complete interactive diagram."
--TASK--
"Let's introduce data to make the diagram more complicated, useful. Get some graph paper and plot these values."
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1) Original equilibrium: P₁ = $10, Q₁ = 100
2) After tax: consumers pay $12
3) After tax: Producers receive $8
4) After-tax: Quantity transacted 'Q₂' = 80
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"Now work out the value of..."
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"Unit tax" = ?
"Total tax revenue" = ?
"Consumer incidence" = ?
"Producer incidence" = ?
"After-tax producer TR" = ?
"Original producer TR" = ?
"Change in producer TR" = ?
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"It should look like this, did you get it?"
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"The example above shows that the tax incidence is divided up equally between the consumer and the producer, but what actually determines this share?" "Move the sliders on the diagram below to find out."
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--TASK--
Complete these sentences and sketch diagrams to illustrate each case."
"The share of the indirect tax is determined by the relative elasticities of demand and supply, and we can conclude that..."
"If PED > PES, the incidence falls more on the..."
"If PED < PES, the incidence falls more on the..."
"If PED = 0, the incidence falls 100% on the..."
"If PED = ∞ , the incidence falls 100% on the..."
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--REASONS--
--REASONS--
"Indirect taxes clearly GENERATE TAX REVENUE FOR GOVERNMENTS that can be spent on FUNDING MERIT GOODS, etc."
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"Furthermore, they can be used to RAISE THE PRICE OF IMPORTS in order to PROTECT DOMESTIC PRODUCERS and JOBS."
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"In addition, they can be used to DEAL WITH 'the OVERPROVISION of DEMERIT goods', as the higher prices discourage CONSUMPTION & PRODUCTION of demerit goods such as cigarettes and CO₂ emissions."
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--TASK--
"Use the sliders below to extract the appropriate diagrams to illustrate how the imposition of an indirect tax can reduce consumption of cigarettes and CO₂ emissions from coal-fired electricity generation."
--EFFECTIVENESS--
--EFFECTIVENESS--
"Clearly a higher price should lower the level of provision, but we have seen above that the PED actually determines how much this fall is relative to the price rise."
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--TASK--
"Adjust the slider below to see how PED impacts the reduction in quantity transacted." "What can you conclude?"
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"That's right; the more inelastic the demand, the smaller the reduction in quantity consumed; therefore, INDIRECT TAXES ON INELASTIC DEMERIT GOODS ARE NOT VERY EFFECTIVE AT REDUCING OVERPROVISION, which is problematic as many demerit goods like cigarettes, alcohol, and gambling are addictive in nature."
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"In addition to the PED, there are other factors that limit its effectiveness: for instance, CALCULATING THE EXTERNAL COST, THE SOCIALLY OPTIMAL LEVEL, AND THE SUBSEQUENT TAX NEEDED IS VERY DIFFICULT."
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"Furthermore, it would ONLY BE EFFECTIVE IF THE SIZE OF THE PRICE HIKE WAS A SIGNIFICANT PORTION OF A SMOKER'S INCOME; if it only constituted a small percentage, then it would be ineffective."
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"Moreover, it could be seen as POLITICALLY UNPOPULAR, especially with addictive goods, especially if the industry is a large employer."
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"And without doubt a BLACK MARKET will develop that will require policing at the taxpayer's expense."
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SUGARY DRINK PRODUCERS HAVE NO INCENTIVE TO REFORMULATE TO LOWER SUGAR CONTENT AND AVOID THE TAX as the tax is imposed on UNITS PRODUCED rather than on SUGAR CONTENT.
'Tax per unit' vs 'Tax per measure'
--3.2.2 IMPACT/INCIDENCE OF SUBSIDY--
--3.2.2 IMPACT/INCIDENCE OF SUBSIDY--
--DEFINITION--
UNIT SUBSIDIES are fixed payments paid by the GOVERNMENT to PRODUCERS for each unit of a good or service they produce or sell. It effectively LOWERS THE COSTS OF PRODUCTION, allowing firms to SELL MORE OF THEIR PRODUCT at LOWER PRICES to CONSUMERS.
GOVERNMENT → PRODUCER → CONSUMER
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"This encourages producers to supply more at each price, INCREASING THE WILLINGNESS TO SUPPLY at each price level, causing a RIGHTWARD SHIFT IN THE SUPPLY CURVE.
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"As mentioned in the definition, the subsidy is included in the selling price, so what happens to the price the consumer pays?"
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"That's right, the price the consumer pays decreases..."
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"...and if, after selling it at the lower price, the seller receives the unit subsidy from the government, what happens to the amount of money they actually receive after tax?"
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"That's right; 'after-subsidy' the price the seller actually receives increases..."
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"So if we return to our laws of demand and supply, we should realise that a unit subsidy leads to an EXTENSION in both the quantity demanded and supplied, via a lower price for the consumer and a higher price for the producer."
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--TASK--
"Sketch the diagram below."
--TASK--
"Now indicate the following..."
1) "The subsidy paid by the government per unit."
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That's right, it's the vertical gap between the two prices."
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--TASK--
"Next, indicate...
2) "The total subsidy paid by the government."
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"That's right, THE TOTAL SUBSIDY is equal to the subsidy paid per unit MULTIPLIED BY THE NEW QUANTITY."
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--TASK--
"Next indicate...
3) "The amount of subsidy benefit received by the consumer."
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"You should have seen that in our example the tax incidence is 'shared' between the consumer (this is called the CONSUMER TAX INCIDENCE/BURDEN) and the producer (this is called the PRODUCER TAX INCIDENCE/BURDEN), with the upper portion being paid by the consumer (equal to the difference between the original price piad and the after-tax higher price paid * quantity transacted)."
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--TASK--
"Next indicate..."
4) "The amount of subsidy benefit received by the producer."
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"...so the lower portion of the incidence must be paid by the producer (equal to the difference between the original price received and the after-tax price received * quantity transacted)."
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--TASK--
"Next, indicate..."
5) "After-subsidy revenue earned by the producer."
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"...the after-tax money earned by the producer is equal to the after-tax price they receive * the quantity transacted..."
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"Here is the complete interactive diagram."
--3.2.3 DIRECT PROVISION--
--3.2.3 DIRECT PROVISION--
--3.2.4 MAXIMUM & MINIMUM PRICES--
--3.2.4 MAXIMUM & MINIMUM PRICES--
--3.2.5 BUFFER STOCK SCHEMES--
--3.2.5 BUFFER STOCK SCHEMES--
--3.2.6 PROVISION OF INFORMATION--
--3.2.6 PROVISION OF INFORMATION--
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