The difference between direct and indirect taxes
A direct tax takes money straight from a person's income or wealth. An indirect tax adds to the price of goods and services when people buy them.
Real World
When the UK government raised VAT from 17.5% to 20% in 2011, retailers like Tesco absorbed some of the increase to stay competitive — illustrating how indirect tax incidence can be shared.
Exam Focus
A common mistake is saying indirect taxes are always paid by consumers — clarify that the incidence depends on price elasticity of demand and supply.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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