Tax

Question 1

What is direct tax?

Answer 1

Direct tax is directly paid to the government e.g. income tax and corporation tax.

Question 2

What is indirect tax?

Answer 2

Indirect tax is charged on producers of goods/services and paid indirectly by consumers e.g. specific tax and and valorem tax.

Question 3

Draw a supply and demand diagram showing tax revenue.

Answer 3

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Question 4

What is tax burden?

Answer 4

The total amount of tax paid by consumers and producers.

Question 5

When demand is inelastic which is bigger: consumer or producer burden and why? Draw a diagram.

Answer 5

Consumer surplus is bigger than producer surplus.

Producers can pass more burden to consumers as demand isn’t very responsive to price.

Question 6

When demand is elastic which is bigger: consumer or producer burden and why? Draw a diagram.

Answer 6

Producer surplus is bigger than consumer surplus.

Producers can’t pass much burden to consumers as demand is very responsive to price changed so they have to face it themselves.