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3. (a) Distinguish between Direct Taxation and Indirect Taxation and state one example of each - Leaving Cert Economics - Question 3 - 2017
Question 3
3. (a) Distinguish between Direct Taxation and Indirect Taxation and state one example of each. (b) Why are Indirect Taxes sometimes seen as inequitable?
Worked Solution & Example Answer:3. (a) Distinguish between Direct Taxation and Indirect Taxation and state one example of each - Leaving Cert Economics - Question 3 - 2017
Step 1
Distinguish between Direct Taxation and Indirect Taxation and state one example of each.
Answer
Direct taxation refers to taxes imposed on individuals or organizations based on their income or wealth. These taxes are paid directly to the government by the taxpayer. Examples include:
- PAYE (Pay As You Earn): A system of withholding taxes directly from wages.
- Corporation Tax: A tax on the profits of companies.
- Capital Gains Tax: A tax on the profit from the sale of assets.
Indirect taxation, on the other hand, deals with taxes levied on goods and services rather than on income or profits. These taxes are typically collected by an intermediary, such as a retailer, who then pays it to the government. Examples include:
- VAT (Value Added Tax): A tax on the value added to goods and services.
- Excise Duties: Taxes imposed on specific goods, such as alcohol and tobacco.
- Stamp Duties: Taxes on the transfer of property or certain legal documents.
Step 2
Why are Indirect Taxes sometimes seen as inequitable?
Answer
Indirect taxes are often viewed as inequitable because they can disproportionately affect individuals with lower incomes. This occurs because:
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Regressive Nature: Indirect taxes tend to take a larger percentage of income from low-income earners compared to high-income earners. For example, a lower-income individual spends a higher proportion of their income on consumables which are subject to indirect taxes.
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Uniform Application: Since indirect taxes are applied uniformly to all consumers regardless of income, they do not account for the taxpayer's ability to pay. This can lead to financial strain on those with limited resources.