Indirect taxes: things you must know

Indirect taxes: things you must know

we’ll take a look at indirect taxes in the UK

indirect_tax

so the UK government raises just under eight hundred billion pounds a year in taxes it’s about 37 percent of GDP now the majority of tax comes from three main sources income tax national insurance contributions and v80 which appears top left in this graphic, of course, the v8e is an indirect tax and about 10% of total tax revenues come from India taxes this is worth bearing in mind when assessing changes to the UK tax system so this graphic gives you some good examples of indirect taxes

what are they well an indirect tax is a tax imposed levied on a producer or a supplier by the government and examples include the duties on tobacco beer cider wine spirits fuel duty the recently introduced sugar tax and also of course v80 carbon taxes on pollution emissions can also be considered in indirect tax so to of course import tariffs

 indirect taxes are a way of governments intervening in markets often with the aim of addressing one or more market failures and the key point about an indirect tax is that the supplier may be able to pass on some or all of the burden of the tax on to the consumer in the form of a higher price or they may choose to absorb the tax by keeping their prices the same and therefore earning a smaller profit margin

 so some examples of indirect taxes here but in particular get a feel for the amount of money or revenue that the UK government gets from these taxes v80 by far the biggest 130 billion pounds plus per year but fuel Duty brings in a lot of money nearly 600 million pounds a week tobacco taxes moving up towards 10 billion a year beer and cider duty and passengers passengers duty on air fares gambling duties and of course inject taxes in the property market including stamp duty quite sizable 11 used them this child is important just to give a bit of context indirect taxes as a whole taking about ten and a half percent of GDP per a year that’s below personal income taxes but it’s clearly the second main block if you like or cluster of tax bonus corporate taxes bring in only about 3 percent of GDP for the government

 it’s important when you get a question on indirect taxes to be able to use an analysis diagram so an indirect tax is a tax that increases the supply costs faced by producers and the amount of the tax is always shown by the vertical distance between the two supply cubes shown here as a parallel shift in other words there was a specific tax per unit well because of the tax producers can’t supply as much in these price level so therefore there was in the inward shift of the supply curve and that will cause a contraction of demand but of course crucially the impact of attacks depends on the price elasticity of demand in this case demand has been shown as price inelastic whereby most of the tax is absorbed by the supplier and only a relatively small proportion is passed on to the consumer that’s shown in green contrast that with this diagram where the elasticity demand is lower the coefficient or elasticity is less than 1 and in this case the same tax causes an increase in price to p2 but most of the tax in this instance is paid by the consumer these two diagrams show the effect of a specific tax asset tax per unit there is, of course, an ad valorem tax bat is a good example of percentage tax and this is the key diagram to draw off an ad valorem tax as the price goes up the amount charged in tax also goes up because of course 20% of a hundred pounds is not as much as 20% of 2,000 pounds .

v80 is the biggest single indirect tax in the UK and the standard weight is 20% that went up from seventy and forty-five percent a few years back now there was a reduced a lower rate of 5% applied to things like fuel bills sanitary products for women children’s car seats contraceptives there’s a big debate at the moment about when the government will bring in zero v80 on women’s sanitary products there’s no VIT on food new buildings bus fares books magazines and children’s clothing and prescription drugs at the moment there’s no v80 on that and once where the items are exempt from via t including lint at the moment school fees again a debate there and it just charges postal stamps burial and cremation charges you only pay VA to your small traders only pay via t if they’re below the annual turnover limit for VA t registration which i think at the moment is 85 thousand pounds per year so those small traders may not pay any VA T at all in that situation so just to finish with this one take a little look at this question about whether indirect taxes are regressive the richest 20% of households pay a lot in indirect tax they pay over twelve thousand pounds in indirect tax per year the poorest pay four thousand six hundred for the bottom quintile at twenty-seven percent of the disposable income whereas for the richest quintile which is 20 percent it’s 14 percent so in that sense when measured relative to household incomes indirect taxes are judged as were aggressive in there was the burden falls more heavily on low-income households however when you measure it relative to spending it’s less for aggressive but this just shows that the bottom quintile of households typically pay a higher percentage of their disposable income in indirect taxes compared to the top quintile so in that sense indirect taxes are regressive and that’s a key evaluation point to point a nursing there we go a quick look at indirect taxes