S/E/58. Does it matter whether government revenue is increased through direct or indirect taxes? Discuss the desirability of increasing revenue from VAT by extending its coverage compared with raising the rate.

The terms direct and indirect refer to two different approaches to taxation. Direct taxes are collected by the government from the persons it is levied on and include income tax and corporation tax. An indirect tax is a tax which is collected by intermediaries who then pass revenues to government. Examples of indirect taxes include value added tax (VAT), excise taxes and levies on petrol, cigarettes and tobacco. The overall tax system comprising direct and indirect taxes can be used to encourage or discourage certain activities or to correct market failure.