Essay Assess The Likely Economic Effects Of Indirect Taxes

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Governments in several countries, including the UK, Spain, Ireland and Hungary, have increased their indirect tax rates in recent years. Assess the likely economic effects of such a tax increase in a country of your choice. (20 marks)
Indirect taxes are those imposed by a government on goods and services. There are many positive and negative implications of such a tax increase on both the consumer, producer and the government. There are two types of indirect taxes, specific and ad valorem. A specific tax is a set amount of tax per unit sold. For example a 60p tax on cigarettes. In contrast an ad valorem tax is a percentage tax based on the value added by the producer.
One of the positive economic effects of an increase in indirect taxes is that it may be an incentive to work, this would have positive implication for a country such as Spain who has the 26th highest unemployment rate at 22.7%. A higher VAT rate would cause a fall in real incomes. This could increase the incentives to work if people wish to maintain their standard of living. However indirect taxes can be regressive as taxes can fall more heavily upon the poor than on the rich as …show more content…

Ad valorem tax allows government revenue to automatically increases as the economy grows. This means that the tax rate does not need to be adjusted frequently, as in the case of specific unit taxes, such as duties on cigarettes and alcohol. Tax revenues would particularly increase if demand for the goods or services was price inelastic, so despite the increase in price consumers would opt to buy the good or service regardless, this causes tax revenues for the government to also increase. However the increase in indirect taxes could cause living standards to fall, particularly in countries such as Spain who already have such a high unemployment rate however wages may also increase in a response to an increase in

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