ABSTRACT

The quantitative impact effect of a tax change depends also upon the extent to which the taxpayers adjust their consumption or their savings to meet the change. Hence the effects of changes in indirect taxes are likely to differ considerably from those resulting from changes in direct taxation or in the receipt of transfer payments (e.g. a social dividend). In so far as a change in a direct tax or a transfer payment and so in disposable income is expected to be temporary (which is likely to be so in the case of a stabilising surcharge or subsidy), then on the 'permanent-income' principle the temporary change is likely to affect mainly the taxpayer's savings. In so far, however, as a rise in an indirect tax and so in the money price of consumption goods and services is expected to be temporary, there will be a strong incentive to postpone consumption until prices fall again. This could, however, lead to a perverse speculative effect if, in anticipation of an expected rise in an indirect tax in a period when damping down of money expenditures is needed, consumers spent heavily in order to purchase before prices were raised. The moral is that if indirect taxes are to be used successfully as a fine-tuning regulator the authorities must be able and willing to change the rate quickly and, if necessary, frequently. By speed of change is meant a short time lag between the realisation by the authorities that the economy needs a boost or a restraint and the actual application of the new rate of tax.