ECONcepts Vol. 2: Taxation and Fiscal Policy
By the Education & Research | July 2015

What is Fiscal Policy: History and Rationale

Fiscal Policy deals with initiatives to influence the economy through the use of government spending and taxation. It can be used as a form of government intervention, in an effort to promote equity between citizens by reallocating income and resources to different socioeconomic classes.

Taxation is an integral component of Fiscal Policy. It is a levy imposed by a government or an institution, wherein the failure to comply to payment is often punishable by law. Taxes act both as a mode for extra government revenue and, at times, an instrument to encourage or discourage undesirable behavior (externalities). Tax Revenue is usually used for social services that are extended to the more marginalized sectors in society; it is often used to disincentivize behaviors like sin tax.
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Equity is usually the goal of fiscal policy.
Direct Taxing vs. Indirect Taxing

Direct Taxing is a levy that is given by a person or an organization straight to the government or the institution; this kind of tax may not be shifted to another entity. Examples of direct taxes include income, corporation, property, inheritance and gift taxes.

Indirect Taxes, on the other hand, may be converted to a separate entity; it is a levy on a product that is usually collected by an intermediary, often increasing the price of different products. Customs, consumption, services and sales tax are all examples of indirect taxes.

In comparison, indirect taxes have a greater burden on the consumers than direct taxes. This is because indirect taxes affect the prices of consumed goods, which lessens demand because of both the income effect and substitution effect, as compared to a singular decrease in purchasing power from a direct tax. Nevertheless, it is pointed out that indirect taxes apparently yield higher government revenues due to the levies collected per consumption.
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Expansionary and contractionary fiscal policies, along with the monetary policy, are tools used by the government to affect the macroeconomy.
The Economics of Taxing (Expansionary and Contractionary Taxing)

Taxation could lead Fiscal Policy to go either way. It has a direct effect on aggregate demand; higher taxes increases prices of goods, effectively decreasing the purchasing power of the consumer, which in turn decreases demand. Conversely, lower taxes increase wealth, which encourages the consumer to spend, increasing demand. 

References: 
http://www.econlib.org/library/Enc/FiscalPolicy.html
http://www.cliffsnotes.com/more-subjects/economics/fiscal-and-monetary-policy/fiscal-policy
http://mospi.nic.in/Mospi_New/upload/statistical_year_book_2011/SECTOR-1-INDIA%20AN%20OVERVIEW/CH-06-DIRECT%20&%20INDIRECT%20TAXES/DIRECT-INDIRECT%20TAX-WRITEUP.pdf
ECONcepts Series

Vol. 1: John Nash & Game Theory

Vol. 2: Economics of Taxation

Vol. 3: Government Budget

Vol. 4: Unemployment