This revision resource focuses on the economics of indirect taxes.
An indirect tax is a tax imposed by the government that increases the supply costs of producers. The amount of the tax is always shown by the vertical distance between the pre- and post-tax supply curves. Because of the tax, less can be supplied to the market at each price level.
Excise duties in the UK are indirect taxes levied on three major categories of goods – alcoholic drinks, tobacco products and road fuels. Generally, excise duties are charged a flat (or specific) rate: a certain number of pence per pint, per litre, per packet - though tobacco is subject to an additional ad valorem tax.
In 2019/20, £134 billion was raised from VAT in the UK although this is expected to fall in 2020 because of the recession
There are around 2.3 million VAT-registered businesses in the UK, with around 3.6 million unregistered. A business needs an annual revenue in excess of £85,000 a year to be liable to pay value added tax.
Indirect tax analysis diagram
How do we show the burden of an indirect tax?
An ad valorem tax imposes a tax on a good or asset, depending on its value. The tax is usually expressed as a percentage. For example, in the UK, VAT is charged at 20% on most goods offered for sale.
Examples of ad valorem taxes in the UK (January 2021)
Value Added Tax - main rate is 20%
Insurance Premium Tax
Stamp Duty Land Tax (SDLT)
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