Theory question 102
Public FinanceThe statistical representation in Figure 2 below shows the sources of revenue for Country P in the year 2014. Use it to answer the questions that follow.
(a) What name is given to the diagram above?
(b) Define an excise duty.
(c) If revenue from personal income tax was $800 million, calculate the: (i) total revenue for the year; (ii) total direct tax for the year.
(d) Determine the percentage of total revenue that was collected from indirect tax.
(e) State two advantages indirect taxes have over direct taxes.
Show the model answer
(a) A pie chart.
(b) An excise duty is a tax on goods produced (manufactured) within the country.
(c) Personal income tax angle x = 360° − (74° + 49° + 80° + 85°) = 72°.
(i) 72° ↔ $800 million, so total revenue = 360/72 × 800 = $4,000 million.
(ii) Direct taxes = company tax 74° + personal income tax 72° = 146°: 146/360 × 4,000 ≈ $1,622.2 million.
(d) Indirect taxes = excise 85° + sales tax 49° + import duty 80° = 214°: 214/360 × 100 ≈ 59.4%.
(e) Any two: difficult to evade (included in prices); convenient, paid in small amounts; wide coverage including the informal sector; cheap to collect; can discourage harmful goods; can protect infant industries; does not directly reduce the incentive to work.
Find the missing angle first; the angles add up to 360°.