Business economy Essay Example | Topics and Well Written Essays - 1000 words

Business economy - Essay Example An excise tax is defined as a tax imposed on a specific amount per unit of product, and for this reason is sometimes also referred to as a specific tax (Keats & Young, 2005, p. 149). In contrast, there are ad valorem taxes such as sales taxes, which are imposed on the value or price of the product or service. Taxes imposed on â€Å"unhealthy† goods are also called â€Å"sin taxes.† They are usually state-sponsored taxes which legislators readily resort to at times when the government is seen to run a budget deficit and needs to raise funds. The taxpayers rarely protest any imposition or increase of sin taxes, for the reason that the tax is not imposed on the general public but only those who buy the product which is seen as harmful to them, anyway. Sin taxes may either be specific or ad valorem, and are generally imposed on cigarettes or tobacco, liquor, and gambling. (Investopedia, 2009) The price, income and cross-price elasticities of demand as well as the price elasticity of supply all bear on the effectivity of imposing sin taxes. Price elasticity measures changes in demand due to changes in prices of the good, income elasticity the changes in demand due to changes in the buyer’s income, and the cross-price elasticity of demand changes in demand for a good due to a percentage change in the price of a related good. On the other hand, the price elasticity of supply refers to the percentage change in the quantity supplied for a good given the percentage change of price for that same good. These four elasticities are important in the determination of the tax incidence, though those that bear most directly are the price elasticities of demand and supply. This is because different commodities have different responses to increase in prices, and government’s selection of which commodities to tax and how much to tax will determine government revenue. Rose (2003) observes that this was considered by Adam Smith