The table shows how the source of government revenue differs between developed and developing countries. Revenue source Developed countries (%) Developing c...
Question 1 Report
The table shows how the source of government revenue differs between developed and developing countries.
| Revenue source | Developed countries (%) | Developing countries (%) |
|---|---|---|
| Income tax | 35 | 12 |
| Sales/VAT | 30 | 25 |
| Trade taxes (tariffs) | 5 | 30 |
| Other | 30 | 33 |
Answer Details
The correct answer is Income taxes are more difficult to collect where many workers are in the informal sector.
In many developing countries, a large proportion of the workforce operates in the informal sector, where earnings are not officially recorded and workers are not registered for tax purposes. This makes income tax extremely difficult to collect, as the tax authorities cannot identify or assess the incomes of informal workers. In contrast, trade taxes (tariffs on imports) are relatively easy to collect at ports and borders, where goods must pass through customs. This is why developing countries tend to rely more heavily on trade taxes as a source of government revenue.
The option about lower levels of international trade contradicts the fact that these countries do trade significantly. The option that developed countries do not collect any trade taxes is incorrect; they do collect them, just at lower rates. The option that trade taxes generate more revenue than income taxes in all economies is wrong; this is specific to developing countries with large informal sectors.
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