Assess the view that raising direct taxes to finance an increase in government spending is better than raising indirect taxes

AQA A-Level Economics Paper 2 June 2025

Assess the view that raising direct taxes to finance an increase in government spending is better than raising indirect taxes. (25 marks)

• Paragraph 1
  • Argument: raising direct taxes is better as it can be target high earners and therefore have minimal effect on macroeconomic performance; smaller multiplier, inequality
  • Diagram: small decrease in AD
  • Evaluation: incentives, Laffer curve
• Paragraph 2
  • Argument: raising indirect taxes is better as it does not affect the productive potential of the economy as much through changes in incentives, and it can be used to target market failures
  • Diagram:
  • Evaluation: depends on which goods are taxed and by how much, and it depends on how the tax revenue

A fiscal deficit is when government spending exceeds tax revenue in a given year. Fiscal policy can have an effect on both aggregate demand and aggregate supply, and therefore be used to influence macroeconomic objectives. Changes in taxes and spending can also influence levels of inequality as well as the patterns of economic activity in the UK.

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