2016 (Indirect Tax) Paper 3 HL

2016 Indirect Tax Paper 3 HL

(e) (i) On the diagram, plot and label the new supply curve for sugar.

(ii) State the size of the tax per ton of sugar.

 The vertical distance is the size of the tax = $40

(iii) Calculate the producer surplus, which will be earned following the imposition of the tax.

120 – 90 = 30 (height)

Base = 150 (quantity sold)

150 x 30 = 4500/2 = 2250 (000 tons)

(iv) Determine the incidence of the tax per ton on producers of sugar in Country C.

First, Understand that the Total Amount of Consumers & Producers Tax Incidence is the Government’s Revenue (Tax Wedge). That rectangle up there is the total amount of revenue that goes to the government due to the Indirect Tax.

The Top section of the Tax Wedge is the amount of the tax that consumers will pay.

The Bottom section is the amount of tax the producer will pay. The amount each pays is known as the tax incidence.

 

This problem wants us to calculate the amount of tax incidence that producers have for 1 ton.

 

Notice that the blue square above has a height of 10 and a base of 25. This 1 square represents 1/6^th of the producers tax incidence.

$10 x 25 = $250 The blue square represents $250 of tax owed to the government or the tax incidence of the producer.

We only need 1 ton of tax incidence not 25, so 250/25 = $10

 

The IB explains it as recognizing that $90 - $80 = $10

(f) (i) With reference to the distribution of income, distinguish between equity & equality.

 

Equity = refers to an income distribution which is fair.

(People get the income they deserve)

 

Equality = refers to income being distributed equally.

(People get the same income)

 

(ii) Explain, using an appropriate example, why an indirect tax might not be equitable.

 

Indirect taxes are regressive in that the tax represents a higher proportion of income of lower income households and therefore may be considered inequitable and unfair.

Examples, cigarettes, Vat taxes, etc