How can indirect taxes affect consumer spending​

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Answer :

Indirect Taxation and Consumer
Indirect taxation is defined as taxation imposed upon others than the person who is intended to bear the final burden. There has been a gradual shift away from direct towards indirect taxes especially in the UK over recent years. Increased indirect taxation has allowed the government to reduce the overall tax burden on income and capital. Both income tax and corporation tax rates have been lowered. Supply-side economists believe that indirect taxes are preferable to direct taxes because they create less of a disincentive to work since employees retain more of what they earn. The argument runs that workers will respond to lower marginal tax rates by expanding the hours they work and raising productivity.
There are two effects from a tax change from direct taxes to indirect taxes; the substitution and the income effect.
1- Substitution effect: when income tax rates are cut the return to working extra hours rises. This means the opportunity cost of leisure time is higher than before.
2- Income effect: when tax rate are reduced, people can earn a particular "target" post-tax income with fewer working hours than before the tax cut. If they regard leisure as a normal good, they may prefer to switch out of work and enjoy more leisure time whilst still earning the same income.
In the comparison between these two effects the results of research are ambiguous, one group where increased indirect taxation and reduced direct taxation might improve incentives are households who affected by the poverty and unemployment traps. People in low paid jobs and the currently unemployed may have little incentive to take paid work or work extra hours if the net financial benefit of doing so is very small. Extra income may be subject to income tax and national insurance and means-tested benefits may be withdrawn as additional income comes in from working. Lower starting rates of income tax may provide a better incentive for low-paid workers to enter the active labor market. The Labor Party has brought in a 10% starting rate of tax and has also introduced the working families' tax credit as part of a strategy to boost the post-tax incomes of families in poorly paid jobs.

Advantages of indirect taxation:

1-One advantage of indirect taxes is that they can be used explicitly to correct for market failure caused by environment damage. Indeed governments across the world are coming to the view that indirect taxes can be used more intensively to meet environmental objectives.
2-The use of indirect taxation is one solution to the problem of externality: the producer or consumer is charged the full social cost and demand will respond accordingly. Environmental economists argue that the most effective way to protect the environment from carbon dioxide and other energy-linked pollutants is to tax the pollute.
Indirect tax increases will push up prices, decrease consumption and hence reduce the effects of negative externalities such as damage to the environment. However, there is a danger that using green taxation to influence demand will damage specific industries. For example, the high rate of taxation on alcohol sold in the UK, as opposed to continental Europe, has badly affected UK drink industries. A huge trade in importing alcohol has grown up, resulting in many jobs being lost in the UK.
Indirect taxation gives the government more control over its use of fiscal policy. In theory, certain indirect taxes can be changed between budgets without parliamentary approval. In contrast, direct taxes can only be changed in the annual budget.
Disadvantages of indirect taxation:
An important argument against indirect taxes is that they tend to be regressive. Since each individual pays the same rate on their purchases, the poor pay a larger proportion of their incomes in indirect taxes (in comparison with direct taxes which tend to be progressive and are seen as more equitable – the proportion of income paid in taxes rises as income rises when a tax is progressive). An example of this in the UK is the high level of duty on tobacco products. Evidence from the Office of National Statistics shows, which the duty on tobacco takes up a much larger percentage of the disposable incomes of lower income groups.