Tax - Economics Unit 1 + 3

TAX  A tax is a compulsory charge made by the government, on goods, services, incomes or capital.
Reasons for tax:

• Raise government revenue
• reduce inequality
• reduce competitiveness of foreign goods
• influence public spending

Tax - Unit 1:

• Direct tax is tax levied on an individual or organisation ie. income or corporation tax.
• Indirect tax is usually levied on purchase of goods or services. A tax on expenditure.

Indirect tax 

Has two types. Tax raises the price of a good by adding to the supply curve and shifting it left. In unit 1 taxes are used to solve negative externalities. ie. use of cigarettes.

• Ad Valorem tax - charged as a percentage of the price of the good. ie. VAT is 20%. Causes pivotal rotation of supply curve.

• Specific tax - charged a fixed amount per unit of a good. ie. excise tax on wine. Causes a parallel shift of the supply curve. 

The incidence of tax falls on partly the consumer and producer but the majority is dependent a combo of the PED and PES for that good. Goods that have inelastic demand such as addictive products ie. cigarettes, usually the incidence falls mainly on the consumer. This means the firm can pass on a higher price to them as they are willing to pay. 

A diagram shows how the incidence falls.

Here is a relatively even incidence but in some cases it can be heavily on the consumer or heavily on the producers dependent on the elasticities.

Tax - Unit 4:

Two types of tax already mentioned. Indirect is levied on expenditure and direct are those that cannot be passed on to anyone else and levied on income and wealth.

main direct taxes are income, corporation and capital gains. 

Three broad categories for taxes:

• progressive tax - as you get richer you pay more tax ie. income. to redistribute wealth.
• proportional - the percent you pay stays constant. ie. earn 10% more so you're taxed 10% more.
• regressive - the poorer you are the more you pay. ie. VAT, you can argue that as a percent of income they pay more than the rich. 

The Laffer curve

The laffer curve shows that in theory tax gets to a certain level where people pay then when it goes any higher people are disincentivised (due to more income going to government) and tax revenue decreases.

After tax rate of M the revenue starts to decrease, this is showing that people are not incentivised.