Taxes

Direct taxes Tax on income and earnings. E.g. Income tax. If direct taxes are increased this will reduce people’s disposable income shifting the demand curve to the left. Price ($) S P1 P2 D1 D2 Q2 Q1 Quantity (units)

Indirect taxes A tax on consumption or spending. E.g. GST. An indirect tax will affect the supply curve Remember that GST is added on top of the price the seller will receive therefore will shift the supply curve UP (vertically) to reach this new price. S2 Price ($) S1 P2 P1 D Q2 Q1 Quantity (units)

At the new price the difference between the original and new supply curves should reflect the tax, not the difference between the original and new equilibrium points (tax=$20, (70 -50) NOT $10). Price ($) S1 S2 The amount of the tax. 70 60 50 D 40 45 Quantity (units)

Sales Taxes ( Indirect taxes) Indirect tax = A tax on consumption or spending e.g. GST ( Goods and Services Tax) Sales tax will affect supply as the tax effectively increases the producers costs of production. Therefore producers are willing to supply less which will cause supply curve to shift UP (vertically) to reach this new price Example – Government places a $4 tax on Cigarettes 22 20 18 16 14 12 0 2 4 6 8 10 12 S with Tax Price ($) S Pe1 $4 tax Pe Pp D Qe1 Qe Quantity ( 000s)

Sales Tax 22 20 18 16 14 12 0 2 4 6 8 10 12 S with Tax Price ($) S Pe1 The distance between the old and new supply curves is exactly the same amount of the tax Part of the sales tax has been passed on to the consumer through the increase in equilibrium price and part of the tax has been taken on by the producer. 22 20 18 16 14 12 0 2 4 6 8 10 12 S with Tax Price ($) S Pe1 $4 tax Pe Pp D Qe1 Qe

22 20 18 16 14 12 0 2 4 6 8 10 12 S with Tax Price ($) S Pe1 $4 tax Pe Before the tax Consumers Paid =$14 ( Old Equilibrium price, Pe) Producers received= $14 ( Old Equilibrium price, Pe) Quantity sold = 8000 ( Old equilibrium Quantity, Qe) After the tax Consumers Pay = $16 ( New Equilibrium price, Pe1) Producers receive = $12 ( consumers price – tax, Pp) Quantity sold = 6000 ( New Equilibrium Quantity, Qe1) Government Revenue = 24000 ( New Equilibrium quantity x tax amount) 22 20 18 16 14 12 0 2 4 6 8 10 12 S with Tax Price ($) S Pe1 $4 tax Pe Pp D Qe1 Qe Quantity ( 000s)