(Step 1: Define tax)



A tax is a levy or charge imposed by a government to raise costs of production and to reduce consumption of certain goods or services.



(Step 2: Define direct tax and indirect tax)



Two types of taxes are direct tax and indirect tax.

Direct taxes are paid directly to the government by taxpayers, either as individuals or companies, from their incomes. Income tax is an example of a direct tax.

Indirect taxes are collected for the government by retailers and local government bodies. Examples of indirect taxes include ad valorem taxes and specific taxes. A specific tax is levied as a fixed amount per unit while an ad valorem tax is the fixed percentage of prices.



(Step 3: Distinguish between progressive tax and regressive tax)



Both direct and indirect taxes can be classified as being progressive or regressive. The relationship between taxation and income varies for different types of tax.

Progressive taxes are those that when income rises, the proportion of the total paid in taxes increases; the average rate of taxation will therefore be lower than the marginal rate. Examples of progressive taxation are income tax, capital gains tax and stamp duty.