Question

Differentiate between the two types of tax revenue sources of the government.

Hint:

The two tax revenue sources are direct and indirect taxes. In direct taxes impact and incidence are on the same person and cannot be shifted. In indirect taxes they may be on different persons and can be shifted.

Answer 1

Step 1: Name the two types of tax revenue:
The tax revenue of the government comes from two types of taxes: direct taxes and indirect taxes.
The test for telling them apart is who pays the tax to the government and who finally bears the burden.

Step 2: Direct taxes:
In a direct tax, the impact and the incidence fall on the same person. Impact is the person who pays the tax to the government. Incidence is the person who finally bears it.
So the liability to pay a direct tax cannot be shifted to anyone else.
Income tax and corporation tax are examples.

Step 3: Indirect taxes:
In an indirect tax, the impact and the incidence may fall on different persons.
A seller pays the tax to the government but recovers it by raising the price. The buyer finally bears it.
So the liability to pay an indirect tax can be shifted. GST and customs duty are examples.

Step 4: Put the difference side by side:

Basis	Direct tax	Indirect tax
Impact and incidence	On the same person	May be on different persons
Shifting of burden	Cannot be shifted	Can be shifted

Final Answer:
Direct taxes: impact and incidence are on the same entity, so the burden cannot be shifted.
Indirect taxes: impact and incidence may be on different entities, so the burden can be shifted.