What are indirect taxes?
An indirect tax is imposed on producers (suppliers) by the government. Examples include excise duties on cigarettes, alcohol and fuel and also value added tax. Taxes are levied by the government for a number of reasons – among them as part of a strategy to curb pollution and improve the environment. A tax increases the costs of a business causing an inward shift in the supply curve. The vertical distance between the pre-tax and the post-tax supply curve shows the tax per unit. With an indirect tax, the supplier may be able to pass on some or all of this tax onto the consumer through a higher price. This is known as shifting the burden of the tax and the ability of businesses to do this depends on the price elasticity of demand and supply. In the left hand diagram, demand is elastic meaning that demand is responsive to a change in price. The producer must absorb most of the tax itself (i.e. accept a lower profit margin on each unit sold). When demand is elastic, the effect of a tax is t
