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Impact of VAT(indirect tax) rise

khopdee
Posts: 1
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3/31/2015 10:55:52 AM
Posted: 1 year ago
Dear Experts,
I have a question on impact of VAT increase on aggregate demand and aggregate supply, but have not been able to come to a plausible solution/explanation.

My reasoning is that increase in VAT has ony supply side impact and pushes the cost of production. Thereby shifting the aggregate supply curve upwards or inwards.

I do not think the demand side is imapcted as VAT is generally put on inelastic commodities where a rise in VAT will not impact the demand.

Am I correct in deducing that only supply side is impacted with an indirect tax increase?

Thanks and Regards
Dee
Diqiucun_Cunmin
Posts: 2,710
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4/1/2015 1:06:21 AM
Posted: 1 year ago
At 3/31/2015 10:55:52 AM, khopdee wrote:
Dear Experts,
I have a question on impact of VAT increase on aggregate demand and aggregate supply, but have not been able to come to a plausible solution/explanation.

My reasoning is that increase in VAT has ony supply side impact and pushes the cost of production. Thereby shifting the aggregate supply curve upwards or inwards.

I do not think the demand side is imapcted as VAT is generally put on inelastic commodities where a rise in VAT will not impact the demand.

Am I correct in deducing that only supply side is impacted with an indirect tax increase?

Thanks and Regards
Dee

I'm no expert, but I agree with you. It doesn't affect C (since T, Sp and Y are not affected), I (no interest rate change), G or NX (it will obviously drop, but since the drop is cause by a rise in general price level, it doesn't count).

I'm a bit doubtful about your reasoning though. You said 'I do not think the demand side is imapcted as VAT is generally put on inelastic commodities where a rise in VAT will not impact the demand.' If you meant quantity demanded, I don't think that should be considered since it's a micro concept while AD is a macro one.
The thing is, I hate relativism. I hate relativism more than I hate everything else, excepting, maybe, fibreglass powerboats... What it overlooks, to put it briefly and crudely, is the fixed structure of human nature. - Jerry Fodor

Don't be a stat cynic:
http://www.debate.org...

Response to conservative views on deforestation:
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Diqiucun_Cunmin
Posts: 2,710
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4/1/2015 11:25:13 AM
Posted: 1 year ago
At 4/1/2015 1:06:21 AM, Diqiucun_Cunmin wrote:
At 3/31/2015 10:55:52 AM, khopdee wrote:
Dear Experts,
I have a question on impact of VAT increase on aggregate demand and aggregate supply, but have not been able to come to a plausible solution/explanation.

My reasoning is that increase in VAT has ony supply side impact and pushes the cost of production. Thereby shifting the aggregate supply curve upwards or inwards.

I do not think the demand side is imapcted as VAT is generally put on inelastic commodities where a rise in VAT will not impact the demand.

Am I correct in deducing that only supply side is impacted with an indirect tax increase?

Thanks and Regards
Dee

I'm no expert, but I agree with you. It doesn't affect C (since T, Sp and Y are not affected), I (no interest rate change), G or NX (it will obviously drop, but since the drop is cause by a rise in general price level, it doesn't count).

I'm a bit doubtful about your reasoning though. You said 'I do not think the demand side is imapcted as VAT is generally put on inelastic commodities where a rise in VAT will not impact the demand.' If you meant quantity demanded, I don't think that should be considered since it's a micro concept while AD is a macro one.

Actually, I've just realised AD may also move to the left because it worsens business prospects and lowers investment incentive. See Question 10: http://www.hkeaa.edu.hk...
The thing is, I hate relativism. I hate relativism more than I hate everything else, excepting, maybe, fibreglass powerboats... What it overlooks, to put it briefly and crudely, is the fixed structure of human nature. - Jerry Fodor

Don't be a stat cynic:
http://www.debate.org...

Response to conservative views on deforestation:
http://www.debate.org...

Topics I'd like to debate (not debating ATM): http://tinyurl.com...