Per Unit Tax
If the Government imposes a tax on goods such as the amount of the tax varies with the amount produced, this is known as a per unit tax. A tax of this nature increased the cost of production by the amount of the tax as shown on the diagram below.
By the incidence of tax we mean the people who actually pay the amount of tax. It is possible that the selling price of the good may be increased by the amount of tax or the selling price may be unchanged in the tax in effect paid out of profits, or the the selling price may be increased by the amount of an amount of the tax so that part of the tax would be paid by the consumer and part of it paid by the producer of the good.
Price elasticity of demand will be the determining factor as to the incidence of tax. Price would be increased from P1 to P2 and the equilibrium quantity reduced from Q1 to Q2.
If the Minister of Finance has imposed a tax in order to increase revenue, he is likely to select goods with an inelastic demand, e.g. petrol and alcohol.
Because a per unit tax has the same impact on the unit costs of all producers of the good, it is likely to be passed on through increasing the selling price of the good by the full amount of the tax.
Ad valorem Tax
- This tax is charged by the state and municipal governments and is based on the assessed value of a product/property.
- The most common ad valorem tax is the property tax, which is charged on real estate and personal property.
- It is a percentage tax. if the value of the property increases the amount charged increases.