Which is a direct tax?

income tax. It is charged on income and paid by the person who earns it.

A tax takes 10% of everyone's income, whatever they earn. It is

proportional. The percentage is the same at every income.

Which tax is most likely to be regressive?

a fixed tax on each litre of petrol. The same amount of tax is a bigger share of a low income.

Which is a reason for placing a tax on imports?

to reduce imports and protect domestic firms. A tariff makes imported goods dearer.

What is a likely effect of a rise in income tax?

Households have less disposable income. More of each person's income goes to the government.

Taxes · Cambridge IGCSE Economics 0455 revision

In plain words

Taxes are how a government pays for what it does. But a tax does more than raise money. It can make cigarettes dearer, keep out imports, and take more from the rich than from the poor.

Taxes are sorted in two ways: by what is taxed, and by who feels it most.

5 things to know

A direct tax is charged on income or wealth and paid straight to the government by the person or firm: income tax, and corporation tax on company profits.
An indirect tax is charged on spending and collected through sellers: sales taxes such as VAT, excise duties, and tariffs on imports.
A progressive tax takes a larger percentage of income from people with higher incomes. A regressive tax takes a larger percentage from people with lower incomes. A proportional tax takes the same percentage from everyone.
Reasons for taxing: to raise revenue, to discourage demerit goods, to reduce imports, to redistribute income, to influence total demand, and to protect the environment.
Effects: higher income tax leaves households less to spend and may weaken the incentive to work. Higher taxes on profits leave firms less to invest. Higher indirect taxes raise prices.

Worked example

Ali earns $20 000 and pays $2000 in tax. Bea earns $80 000 and pays $20 000. Is the tax progressive, regressive or proportional?

Ali pays 2000 ÷ 20 000 × 100 = 10% of his income.
Bea pays 20 000 ÷ 80 000 × 100 = 25% of hers.
The higher earner pays a larger percentage, so the tax is progressive.

Tips and tricks

Judge a tax by the percentage of income it takes, not the amount. A rich person can pay more dollars under a regressive tax and still pay a smaller share.
Most indirect taxes are regressive: the tax on a litre of petrol is the same for everyone, so it is a bigger slice of a small income.

5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

Taxes: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

Which is a direct tax?
- a sales tax
- a tariff
- income tax (the answer)
- excise duty on fuel
It is charged on income and paid by the person who earns it.
A tax takes 10% of everyone's income, whatever they earn. It is
- progressive
- regressive
- proportional (the answer)
- indirect
The percentage is the same at every income.
Which tax is most likely to be regressive?
- an income tax with higher rates for higher incomes
- a fixed tax on each litre of petrol (the answer)
- a tax on company profits
- a tax on very large inheritances
The same amount of tax is a bigger share of a low income.
Which is a reason for placing a tax on imports?
- to increase imports
- to reduce imports and protect domestic firms (the answer)
- to lower prices
- to increase consumer choice
A tariff makes imported goods dearer.
What is a likely effect of a rise in income tax?
- Households have less disposable income. (the answer)
- Prices in shops rise at once.
- Firms' sales increase.
- Government revenue falls to zero.
More of each person's income goes to the government.

5 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

3 questions, 8 marks. Write your answers on paper, then check them.

Taxes

Cambridge IGCSE Economics 0455 · 8 marks · papermunch.org

Name ______________________________ Date ______________

Explain the difference between a direct tax and an indirect tax.[2]
Show answerHide answer
A direct tax is charged on income or wealth, such as income tax. An indirect tax is charged on spending on goods and services, such as a sales tax.
I got this one
A person earning $10 000 pays $1500 in tax and a person earning $50 000 pays $5000. Calculate the percentage each pays and identify the type of tax.[3]
Show answerHide answer
15% and 10%. The lower earner pays a higher percentage of income, so the tax is regressive.
I got this one
Explain how a progressive income tax redistributes income.[3]
Show answerHide answer
People on higher incomes pay a larger percentage of their income in tax. The revenue can be spent on benefits and services for people on lower incomes, which narrows the gap between rich and poor.
I got this one

Answers: Taxes

1. A direct tax is charged on income or wealth, such as income tax. An indirect tax is charged on spending on goods and services, such as a sales tax.
2. 15% and 10%. The lower earner pays a higher percentage of income, so the tax is regressive.
3. People on higher incomes pay a larger percentage of their income in tax. The revenue can be spent on benefits and services for people on lower incomes, which narrows the gap between rich and poor.