Taxes+including+ad+valorem+taxes+and+excise+taxes


 * __Taxes__**

A tax is a fee charged ("levied") by a government on a product, income, or activity. One of the most important uses of taxes is to finance public goods and services. Since public goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good or service. Therefore, they need to be provided by the government which tend to finance themselves largely through taxes. (1) A tax is also a supply shifter with regard to the supply curve. There are two major taxes; ad valorem and excise, which we will discuss in detail.

__**Ad valorem taxes**__

Ad valorem literally means “in proportion to the value: A phrase applied to certain duties and taxes levied on goods, property, etc. as a percentage of their value…”

An ad valorem tax is charged based on the value of the good being sold. As the price of a good rises, the amount of the tax rises at a proportionate rate.

Perhaps the most common example of an ad valorem tax is the sales tax. Many states charge a certain percentage on all sales. For example, if a state has a 6% sales tax and a consumer purchases $100 worth of goods from a store, the consumer will be charged $106 total. If the consumer had purchased $200 worth of goods, the total bill would have been $212 because an ad valorem tax is based on the value of goods purchased. It increases when a consumer increases the amount of merchandise that is purchased.


 * __Excise taxes__**

Excise: “(1) any tax (2) a tax or duty on the manufacture, sale, or consumption of various commodities within a country, as liquor, tobacco, etc.: also **excise tax** (3) a fee paid for a license to carry on certain occupations, sports, etc.”

An excise tax is a tax on each item sold. It is based on volume rather than the price of the good. Excise taxes are paid to the government by the suppliers of goods. The suppliers typically build this tax into the price of a good and charge an equivalent amount to the purchaser of the good, which effectively passes the tax along to the consumer. An excise tax shifts the supply curve up by the amount of the tax, because producers are willing to sell less than before. Thus, an excise tax has the effect of decreasing the supply of a good.

A common example of an excise tax is the tax charged on alcoholic beverages. Liquor, beer, and wine are all taxed based on the number of units purchased. In Indiana, for example, wine is taxed at the rate of $0.47 per gallon (FTA). In addition to this excise tax, wine is also subject to state sales tax in Indiana, which is an ad valorem tax that is charged based on the amount purchased.

(1) http://www.investorwords.com/4879/tax.html

__Webster’s New World Dictionary of American English: Third College Edition.__ Simon & Schuster, Inc. New York, NY. 1991

Baye, Micheal R. __Managerial Economics and Business Strategy__. 2006, pp. 47-48

http://www.taxadmin.org/FTA/rate/wine.html

__**Questions:**__

1. Which of the following is an ad valorem tax?

a. Sales tax b. City/State tax included in the ticket price for a baseball game c. Tax on a bottle of liquor d. Tariff on an imported sweater

Answer: A. The sales tax is an example of an valorem tax, which is based on the value of the purchase. An item that is priced at $10 will carry a lower ad valorem tax than an item that is priced at $100.

2. Which of the following is an excise tax? a. Tax on a bottle of liquor b. Income tax c. Property tax d. School tax

Answer: A. The tax on a bottle of liquor is an excise tax, which is assigned to specific items. If a consumer purchases 5 bottles of liquor, the amount of tax paid will be calculated based on the number of items that have been purchased rather than on the cost of each individual item.

3. Which tax would prove to be a better strategy for raising revenues for a small city that gets a very large number of visitors several times per year? a. A hotel tax that is assessed as a flat per-night fee b. A higher than average sales tax

Answer: A. The hotel tax will most likely raise more revenue in the long run than the higher sales tax. Since there are visitors a few times each year, it makes more sense to assess the tourists at a higher rate with the hotel tax because an elevated sales tax may discourage local citizens from living in the city full time.

4. You are a seller of gasoline in a small city. The state which you do business in increases the excise tax on gasoline. What will this do to your supply curve?

a. No effect, the supply curve will not change. b. Shift downward, you will supply more c. Shift upward, you will supply less

Answer: C. An excise tax shifts the supply curve upward and you will end up supplying less gasoline.

5. In the end, who actually receives tax money, and who pays the taxes?

a. government receives, producers pay b. producers receives, consumers pay c. government receives, consumers pay

Answer: C. The government receives the tax money in the end, and the consumers pay. The producers and retailers are basically funnels for the money.

6. What does Ad Valorem literally mean?

a. percentage of b. according to the value c. portion of

Answer: B. Ad Valorem literally means according to the value.