Specific tax

A specific tax is a fixed amount of tax placed on a particular good. It is also referred to as a per-unit tax, and the tax will depend on the quantity sold (not price).

specific-tax

Examples of specific taxes

  • A tax of £0.40 on 500 ml sugary drinks.
  • A tax of £3.92 per 20 pack of cigarettes.
  • A tax of £0.75 per litre of petrol.

A specific tax does not vary with the cost of the good – like for example an ad valorem tax – which is a percentage of the price.

Diagram of specific tax

Placing a specific tax on a good shifts the supply curve to the left.

tax on negative externality

The specific tax is P2-P0

  • A specific tax is borne by both producers and consumers.
  • Consumers see the price rise from P1 to P2.
  • Producers receive P0 rather than P1.

Burden of specific tax

tax-on-inelastic-demand

In this case the specific tax is $6. The consumers see a rise in price of $4, and producers see a fall in the price they receive from $10 to $8.

Advantages of specific taxes

  • Easy to understand
  • A specific tax is effective at reducing demand. For example, cigarette tax has steadily contributed to reducing cigarette consumption in past few decades.
  • An ad Valorem tax places a proportionately higher tax on expensive goods. This can encourage consumers to switch from expensive alcohol and expensive cigarettes – to cheaper varieties. A specific tax increases the price of all equally and has a bigger effect on reducing overall demand.

Disadvantages of specific taxes

  • More likely to be regressive. The tax paid will be the same to different income groups. So those on low-income will pay higher percentage of income in tax. An advalorem tax collects more tax from those consumers willing to purchase more expensive varieties.

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By on October 8th, 2019