Taxes and Subsidies

Date: 2023-03-08

Direct tax: tax on income and wealth Paid by households or firms DIRECTLY to the government

Indirect tax: tax on goods and services Paid INDIRECTLY to the government via the sellers of the good

Types of Indirect tax

Specific Tax

• The good or service is taxed a fixed amount per unit (e.g. $5 per unit)
• Hence, tax per unit of the good is the same regardless of the price of the good

  Ad valorem tax

• The good or service is taxed a percentage based on the value of the product (e.g. 7% GST)
• Hence, the higher the price of the good, the higher will be the tax per unit of the good.

Effects of Taxation

Impact of a tax falls on the person on whom the tax is first levied Incidence of a tax refers to the eventual distribution of the tax burder (i.e. who ultimately bears the tax)