Why would a government impose an indirect tax?

Indirect taxes are commonly used and imposed by the government in order to generate revenue. They are essentially fees that are levied equally upon taxpayers, no matter their income, so rich or poor, everyone has to pay them.

Why does the government choose to tax things that are inelastic?

Placing a tax on a good, shifts the supply curve to the left. If demand is inelastic, a higher tax will cause only a small fall in demand. Most of the tax will be passed onto consumers. When demand is inelastic, governments will see a significant increase in their tax revenue.

Why would consumers prefer that the government tax products with elastic rather than inelastic demand?

Consumer prefer that government. Therefore, consumer would prefer the government to tax on elastic goods because it will increase the burden on the consumer as government can take this advantage and charge them higher as the demand will not decrease drastically as they need the product.

Is it better to tax inelastic or elastic goods?

The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax. Tax revenue is larger the more inelastic the demand and supply are.

How does indirect tax affect government?

Definition: Indirect tax is a type of tax where the incidence and impact of taxation does not fall on the same entity. Indirect tax has the effect to raising the price of the products on which they are imposed. Customs duty, central excise, service tax and value added tax are examples of indirect tax.

What are the problems of indirect taxes?

There is lack of cross verification of returns filed under various State as well as Central Taxation Rules and there are different in detailed filed by the assessed by paying Central and State taxes simultaneously. At present there are more than fifteen taxes under Indirect Tax System.

How do governments decide which products and services to tax?

When the government sets a tax, it must decide whether to levy the tax on the producers or the consumers. This is because the economic tax incidence, or who actually pays in the new equilibrium for the incidence of the tax, is based on how the market responds to the price change – not on legal incidence.

Is an indirect tax?

Indirect tax is a tax that can be passed on to another individual or entity. Indirect tax is generally imposed on suppliers or manufacturers who pass it on to the final consumer. Excise duty, customs duty, and Value-Added Tax (VAT) are examples of Indirect taxes.

Is elasticity important in the analysis of the market Why?

Elasticity is an important economic measure, particularly for the sellers of goods or services, because it indicates how much of a good or service buyers consume when the price changes. If the market price goes up, firms are likely to increase the number of goods they are willing to sell.

How does indirect tax affect demand?

The introduction of an indirect tax increases the firm’s costs of production. Therefore, as there is a change in the determinants of supply, the market supply curve shifts to the left. This results in a new equilibrium at a lower quantity and a higher price than the initial equilibrium.

What are the pros and cons of indirect taxes?

Advantages of Indirect Taxes

• Everyone can contribute.
• They are convenient.
• They cannot be evaded.
• They are spread over a wide range.
• Indirect Tax can be regressive.
• They raise price of commodities.
• No civic consciousness.

How does indirect tax correct market failure?

Indirect taxes are associated with market failure to ‘internalise the externalities’ of consumption or production. Such taxes make road users pay for the external costs associated with their use and raises the market price so they limit or switch to substitute goods such as rail, bus and bikes.

What are the benefits of an indirect tax on price inelastic?

However, the benefit to the government of implementing an indirect tax on price inelastic goods/service is that they produce a much larger amount of government revenue (P2-d-c-b) than indirect taxes placed on price elastic goods.

Who bears the tax burden when supply is more inelastic?

If demand is more inelastic than supply, consumers bear most of the tax burden. But, if supply is more inelastic than demand, sellers bear most of the tax burden.

What happens when the government charges an indirect tax?

When the government charges an indirect tax, the relative price of a commodity rises resulting in a reduction in its demand. The government intervenes in the market so as to correct negative externalities and to ensure that neither the producers nor the consumers are exploited.

Which side of the market is most inelastic?

In the tobacco example above, the tax burden falls on the most inelastic side of the market. If demand is more inelastic than supply, consumers bear most of the tax burden. But, if supply is more inelastic than demand, sellers bear most of the tax burden.