Taxes and Subsidies. Government Intervention

Transcription

1 Taxes and Subsidies Government Intervention

2 Link these words in a sentence Demerit goods Consumed Externalities Social Intervention Examples Aim

3 Taxation In this lesson we will Discuss how governments may intervene to reduce the effects of demerit goods Investigate what happens when the government taxes or goods and services By the end of the lesson you should be able to: Explain the reasons why governments tax and goods and services Demonstrate how a tax affects supply and demand Evaluate the impact of taxes on consumers and producers

4 ...in the world nothing can be certain, except death and taxes. Benjamin Franklin

5 Think... Make a list of as many taxes as you can think of. Hint: There are a lot of them! You have 1 minute

6 UK Tax Income 2011

7 Taxes and Subsidies Taxes are used to finance public goods. Guide to Taxes Also used, along with subsidies, to correct a variety of forms of market failure and to reduce inequalities in the distribution of income.

8 Direct Taxes Direct taxes are taxes on the income of individuals and firms. E.g. Income tax and Corporation tax Affect peoples disposable income and their incentives to work and save

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10 Indirect Taxes Taxes (or duties ) are charges imposed by a government on people and firms. Indirect taxes (also known as sales or outlay taxes), are taxes on the production or consumption of goods and services. E.g. Value Added Tax (VAT), Alcohol duty etc Have the same effect as an increase in the cost of production or consumption firms have to pay and extra costs and consumers pay higher prices.

11 Ad Valorem Tax Any tax imposed on the basis of the monetary value of the taxed item. Literally the term means according to value. Eg. V.A.T. (a tax imposed on producers at 20% of cost of supply) Insurance premium tax is charged at 5% of the premium Tobacco duty on cigarettes is charged at 16.5% of the retail price (2011)

12 Some examples stm Cigarette litter fines tm VAT cut for sporting goods

13 Taxation In this lesson we will Discuss how governments may intervene to reduce the effects of demerit goods Investigate what happens when the government taxes or goods and services By the end of the lesson you should be able to: Explain the reasons why governments tax and goods and services Demonstrate how a tax affects supply and demand Evaluate the impact of taxes on consumers and producers

14 Smoking in numbers Focus on: Smoking More than a fifth of adults in England smoke down from nearly a half in the 1970s Despite it being illegal for under 18s to buy cigarettes, one in seven 15 year olds say they are regular smokers Some 63% of smokers say they would like to quit, but over half cannot go a day without lighting up Smoking is linked to 80,000 deaths a year with a third of all lung cancer deaths directly related to smoking There are also 1.5m hospital admissions for problems where smoking is a contributing factor The habit is estimated to cost the NHS more than 5bn a year Customers spend 16.3bn a year on tobacco products

15 Duties (taxes) are imposed on producers, who then pass them on to consumers in the form of higher prices

16 Taxation Diagrams Illustrating the impact of taxation on supply and demand

17 e.g. Tobacco Duty P B P2 P1 P3 C Taxation S + Tax S A D Imposing a tax on producers increases makes it more expensive to produce each unit, so less is produced at any given price level. Higher cost is passed onto consumer (depending on PED for good or service). This reduces demand. Level of tax per unit is shown by the vertical distance between supply curves (B to C) Equilibrium price rises (A to B) and quantity falls (Q1 to Q2) Q2 Q1 Q Tax revenue raised by government

18 The burden of taxation

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20 Indirect Taxation and Price Elasticity If a good is price inelastic, it is likely that the producer will pass on a higher proportion of any tax rise to the consumer. If a good is price elastic, it is likely to pass on a lower proportion of any tax rise to the consumer. Why is this the case? What will affect this?

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24 Taxation In this lesson we will Discuss how governments may intervene to reduce the effects of demerit goods Investigate what happens when the government taxes or goods and services By the end of the lesson you should be able to: Explain the reasons why governments tax and goods and services Demonstrate how a tax affects supply and demand Evaluate the impact of taxes on consumers and producers

25 Group Discussion Is higher taxation the best way to reduce smoking? Justify your view.

26 In the news Analyse the economic issues raised in this article 2. Use a diagram to illustrate the theoretical impact of government intervention in this case. 3. Evaluate the likely effectiveness of government intervention in this market.

27 Possible effects of taxation Government Failure? High Taxes encourage smuggling /06/tobacco vat duty smuggling

28 Analysing Taxation Advantages/Benefits of Taxation as a form of government intervention Disadvantages/Drawbacks of taxation as a form of government intervention What determines how effective a tax might be?

29 Taxation In this lesson we will Discuss how governments may intervene to reduce the effects of demerit goods Investigate what happens when the government taxes or goods and services By the end of the lesson you should be able to: Explain the reasons why governments tax and goods and services Demonstrate how a tax affects supply and demand Evaluate the impact of taxes on consumers and producers