Payers of indirect tax, normally, are unaware that they are being taxed; since the tax is hidden in the prices. If supply is inelastic, producers would bear the tax and vice versa. If demand is perfectly inelastic then consumers would bear the tax.
Examples of indirect taxes are custom duties, excise duties, sales tax, entertainment tax and value added tax.
(b) Fuel in my country is only petrol and electricity from power stations that run on petrol. There are many possibilities as to how a tax will affect individual consumers and the economy.
Consumers can be classified into private motorists and non-motorists. A high tax on petrol will surely cause the price for consumers to rise. Refer to the diagram below:
The tax causes the supply to fall from SS to SS1. The price rises from P to P1.
The supply of petrol is perfectly elastic because Singapore imports all her petrol from the middle east market. The demand for petrol is inelastic because it is an external good and also because the proportions of costs it takes up on private motoring is rather small. The motorists real income would fall but not very significantly and it is also unlikely that in Singapore they would give up cars.
In the case of commuter who use public transport, they too may suffer a fall in real income. Both the bus and MRT service run on petrol and petrol electricity. The tax will raise the cost of operation. Because commuters’ demand for public transport is inelastic, the incidence of tax will be pushed on them. The PED is inelastic because public transport is an inferior good. It is the cheapest form of transport people can reply on. The fall in real income of the lower income group can be quite significant because even $50 increase in expenditure makes up a large percentage of a small income.
A high tax on petrol will cause electricity charges to rise because all of Singapore’s power stations run on petrol. This is on the assumption that the PUB will not be able to absorb the cost. As household’s demand for power is inelastic, they will have to bear the higher charges. Therefore, real income falls. This fall would be more significant for lower income groups than for the rich.
The economy may also be affected adversely. The tax may spark off inflationary trends. Lower income groups who are unhappy over the fall in real income will clamour for higher pay. If they are successful, then companies will have to raise prices to meet the higher wage bill. Thus an inflationary spiral of rising prices and rising wages starts.
For those companies who are unable to meet the higher wage bill, they will have to lay off workers. Unemployment in the country will increase.
The inflationary trend will have its effects on savings, investment and on external balances. During inflation, savings fall because people have to spend more of their income to buy the same basket of goods. A fall in savings may cause interest rates to rise, in turn may cause a fall in investment. Refer to the diagram below:
If the Marginal efficiency or capital (MEC) is elastic , the fall in investment (I to I1) will be more proportionate than the rise in interest rates (r to r1). A fall in investment will slow down the country’s economic growth.
Externally, the country may have loose its competitiveness due to the higher prices of its exports. Growth in exports may slow down and imports may pick up. The country’s balance of payments worsens. In its worse scenario, the country may develop a deficit, and external debt, increased unemployment and a general fall in living standards.
by
adeeba1995yahoocom (student)
