Indirect Taxes and Subsidies

Indirect taxes

• An indirect tax is a tax on goods and services  rather than  on income or wealth. Examples of indirect taxes in the UK are Value Added Tax (VAT) and Excise Duty.
• We pay VAT on most of the goods and services that we buy (two notable exceptions are food and children’s clothes).
• Excise Duty is an extra tax that is paid in addition to VAT on some goods e.g. cigarettes and alcohol.  Excise Duty is an example of a specific tax i.e. the same amount of tax is paid on each item regardless of the value of the item. For example, the same amount is charged on every bottle of still table wine regardless of whether it is a really cheap one or whether it is a very expensive chateaux bottled variety.
• VAT is an example of an advalorem tax i.e. the tax is a percentage of the value of the good. In the UK VAT is 17.5% (20% from January 1st 2011) of the value of the goods we purchase.
• When an indirect tax is imposed on a good, the supply curve will shift to the left. This is because it is the suppliers who actually hand money over to the government so it…