Advantages and Disadvantages of Direct Taxes
Advantages and disadvantages of Direct Taxes
Advantages of Direct Taxes
Direct and indirect taxes have advantages of their own. Direct taxes have some merits and so have the indirect taxes. Direct taxes have the following advantages in their favor: —
1. Equitable. The burden of direct taxes cannot be shifted. Hence, equality of sacrifice can be attained through progression. Of course, the very low incomes can be exempted. This cannot be achieved by taxes on commodities which fall with equal force on the rich and the poor. The tax raises the price of the commodity and the price of a commodity is the same for every person, rich or poor.
2. Economical. Their cost of collection is low. They are mostly collected "at the source". For instance, the income tax is deducted from an officer's pay every month. This saves expense. The employer acts as an honorary tax collector. This means great economy.
3. Certain. In the case of a direct tax, the payers know how much is due from them and when. The authorities also know the amount of revenue they can expect. There is certainty on both sides. Certainty minimizes corruption on the part of the collecting officials.
4. Elastic. If the State suddenly stands in need of more funds in an emergency, direct taxes can well serve the purpose. The yield from income tax or death duties can be easily increased by raising their rate. People cannot stop dying for fear of paying death duties.
5. Productive. Another virtue of direct taxes is that they are very productive. As a community grows in numbers and prosperity, the return from direct taxes expands automatically. The direct taxes yield large revenue to the State.
6. A Means of Developing Civic Sense. In the case of a direct tax, a person knows that he is paying a tax; he feels conscious of his rights. He claims the right to know how the Government uses his money and approves or criticizes it. Civic sense is thus developed. He behaves as a responsible citizen.
Disadvantages of Direct Taxes
1. Inconvenient. The great disadvantage of a direct tax is that it pinches the payer. He 'squeaks' when a lump sum is taken out of his pocket. The direct taxes are thus very inconvenient to pay. Nobody can help feeling the pinch.
2. Evadable. The assessee can submit a false return of income and thus evade the tax. That is why a direct tax is "a tax on honesty". There is a lot of evasion. Many of those who should be paying taxes go scot-free by concealing their incomes.
3. Arbitrary. If taxes are progressive, the rate of progression has to be fixed arbitrarily; and if proportional, 4hey fall more heavily on the poor. Thus, both are bad. The rate of taxes depends upon the whim of the Finance Minister. This is arbitrary.
4. If the taxes are too heavy, they discourage saving and investment. In that, case the country will suffer economically.
The Differences in Taxes
In 1916, the United States changed the tax code. There are two ways to look at this, an economic view or a legal view.
From the economic view, a direct tax will refer to any levy or tax that is both imposed and collected on a specific group of people or organizations. An example of direct taxation would be income taxes that are collected from the people who actually earn their income.
A sales tax would be considered an indirect tax. Since everyone has to pay the same tax, not matter of their income or tax bracket. In the economic view each city, county or state can dictate what their certain taxes can be.
From Investigator Guide, the legal differences are as follows:
A direct tax, according to the United States Constitution will refer to any levy that is both imposed and collected on a specific group of people or organizations. An example of direct taxation would be income taxes that are collected from the people who actually earn their income.
The indirect taxes are imposed upon a broad range of abstract ideas, including rights, privileges, and activities.
This means, legally that the sale of property would be considered an indirect tax while the tax actually owed on the property would be direct. It can be confusing.
Many today are calling for a flat tax, which would eliminate all loopholes and you just pay for what you buy. But of course this has its own problems as with property taxes, city taxes and much more. But the argument for a flat tax would equal out that that those that buy more pay more in taxes.
The problem would be that it could affect those in lower tax brackets that would not get income tax breaks while paying the same amount as those in the higher tax brackets.