Cambridge International as and a level Economics Ebook

part of the indirect tax.
In contrast to the UK, many developing economies 
struggle to collect tax revenues. Pakistan is typical, with 
its government anxious to increase its tax revenue to meet 
the needs of its growing population. In 2012, Pakistan’s 
tax revenue was just 8.5% of its GDP compared to 
around 39% in the UK. Tax evasion is illegal. It is a major 
SELF-ASSESSMENT TASK 
3.2
1
Consider the information in 
Figure 3.6.
Describe 
how the tax structure of Pakistan compares to 
that of the UK as shown in 
Figure 3.4
.
2
Draw two diagrams to show how (i) an 
ad 
valorem
tax and (ii) a 
specifi c tax
aff ect the supply 
curve for a product.
3
Redraw 
Figure 3.5
 to show how the tax burden 
of consumers and producers changes when the 
demand curve becomes more price inelastic.
Taxes on
expenditure
Taxes on income
and businesses
Direct taxes
Personal
(20–25% top rate)
Corporate
(35%)
General Sales Tax (16%)
Exuse Duty (Various rates)
Customs Duties
Property Tax
Capital Value Tax
Indirect taxes
Figure 3.6 
The tax structure of Pakistan
Source:
KPMG, 2013
problem, particularly among companies, and one that 
the Pakistan government is trying to address. One line 
of approach being pursued is to tax companies on their 
revenue rather than on their profi ts. A second approach is 
to tackle corruption in the disclosure of personal incomes 
and the evasion of sales taxes by small retail businesses.
Other taxation issues
In collecting taxes and in the development of taxation 
systems, governments should be very aware of the impact a 
tax has on the various income groups in the economy. Th
is 
is entirely consistent with the equity aspect of the canons 
of taxation referred to earlier.
Th
e average rate of taxation is defi ned as the average 
percentage of total income that is paid in taxes. All forms 
of taxation are included in the calculation. It is clearly 
more equitable for the poorest income groups to have a low 
average tax rate; higher earners in contrast should have a 
higher average tax rate. Th
e marginal rate of taxation is 
diff erent. It means the proportion of an increase in income 
which is paid in taxes to the government. In a progressive 
tax system the marginal rate will be greater than the average 
rate resulting in a more equal distribution of income.
Th
e relationship between taxation and income varies 
for diff erent types of tax. Th
ree relationships can be 
identifi ed: