Cambridge International as and a level Economics Ebook

1 a
Using a diagram, explain why ‘implementation of 
the new law is likely to cause a serious shortage of 
commodities in the market’.
b
What other methods might the Kenyan 
government take ‘to protect consumers against 
exorbitant prices’?
■
transparent – tax payers should know exactly what they are 
paying
■
convenient – it should be easy to pay.
Canons of taxation: 
Adam Smith’s criteria for a ‘good’ tax.
KEY TERM
Th
ese principles are still applicable and underpin the basic 
requirements for any eff ective taxation system.
Figure 3.4
 shows the main types of taxation in the UK 
for 2010/2011. Th
ere are two main types of tax. Th
ese are:
■
Direct taxes
such as income tax, corporation tax on the 
profits of businesses and national insurance contributions 
paid by employers and employees. These are so-called 
because they are paid directly to the government by 
taxpayers, either as individuals or companies, from their 
incomes. In 2010/2011, they contributed 57% of total 
tax revenue.
70
Cambridge International AS Level Economics

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■
Indirect taxes 
such as value-added tax (VAT) on the retail 
sales of many goods and services, excise duties on fuel, 
alcohol and tobacco products. This type of tax also includes 
council tax and business rates that are charged locally on the 
ownership of houses, apartments and business premises. 
Indirect taxes are so-called since they are collected for the 
government by retailers and local government bodies.
Direct tax: 
one that taxes the income of people and firms 
and cannot be avoided.
Indirect tax: 
a tax that is levied on goods and services.
KEY TERMS
In the context of indirect taxes, two main types are 
recognised. Th
ese are:
■
Ad valorem
 
taxes, which are a proportion or percentage of 
the price charged by the retailer. VAT in EU countries such 
as the UK or a general sales tax (GST) as charged in the USA 
and Canada are typical examples. The final price paid by 
consumers is inclusive of such taxes. The tax element may 
be included in the published retail price or, in cases where 
the GST is on everything, added to the price at the final 
transaction stage.
■
Specific taxes in the form of a fixed amount per unit 
purchased. These are widely used to tax fuel, cigarettes 
and alcohol. In all cases the tax is based on a measurable 
quantity, e.g., per litre or per packet of 20 cigarettes. The 
final price will incorporate this tax.
When an indirect tax is imposed, this tax must be paid to 
the government by retailers, wholesalers, manufacturers and 
other providers of taxable goods and services. Th
is means 
that the business receives a price that is higher than the 
original price by the amount of the tax. Th
is is represented by 
a shift to the left of the supply curve by the amount of the tax.
Th
e revenue from taxation is then used by the 
government to fund the various types of public spending 
shown earlier in 
Figure 3.3
.
Indirect taxes are widely used to discourage the 
production and consumption of demerit goods such as 
alcoholic drinks and cigarettes. Th
ey tend to be passed 
on to consumers through increased prices in the market, 
although technically they are imposed on the producer.
Figure 3.5
 analyses the eff ects on the market when 
an indirect tax is levied by the government. It shows 
what is known as the