Direct and Indirect Taxes : Advantages and Disadvantages

There are two different type of taxes direct and indirect, In this article we are going to explorer the different types of taxes, and they advantages and disadvantages.

Direct Taxes

Direct taxes are taxes levied on income and wealth. The impact and incidence of a direct tax is on the same person, that is intended to bear the burden cannot shift it to another person. Examples of direct taxes are income tax, corporation tax,(company tax) capital gain tax, national duties(inheritance tax), CRTV tax, national social insurance.

Advantages of direct taxes

1- Direct taxes are equitable because they are levied according to the ability to pay. Very high income earners pay more than the low earners.

2- Direct taxes are easy to collect because they are usual collected at source
3- The yield and incidence of a direct tax are easy to determine because the government can easily estimate, the amount of revenue for the tax and who pays the tax.
4- Direct taxes can be used to control inflation. Direct taxes reduces consumers’ disposable income. They therefore help to control demand pull inflation.
5- Direct taxes are convenient to tax payer. Income tax for example is convenient because it is collected as the tax payer earns the income.

Disadvantages of direct taxes

1- Direct taxes are a disincentive to work since the more you earn, the more you pay
2- Direct taxes are easily evaded by self-employed people.
3- Direct taxes reduce the level of consumption, saving and investment.
4- The cost of administration of direct taxes is very high that is the amount of expenditure involved in collecting taxes is relatively high.
5- Direct taxes are more complicated because they involve many documents

 

Indirect taxes

Indirect taxes are taxes levied on goods and services. They are essentially taxes on on expenditure. The impact and incidence of an indirect taxes, has direct effect on prices. Taxes therefore lead to inflation. The incidence of an indirect tax may be on different persons. This is because the tax burden can some times be shifted by the producer to the consumer. Examples of indirect taxes are value added tax(VAT) exercise duties, tariffs, vehicle license duties etc.

Specific and ad valorem taxes

An indirect tax can be a specific or an ad valorem tax. A specific tax takes a fixed amount per unit of a commodity sold or produced as tax. An ad valorem tax.  tax is a tax which is expressed as a percentage of the price of the commodity.

Advantages of indirect taxes
1- Indirect taxes are difficult to evade. You can only evade them by not consume,g these goods on which they are imposed.
2- The payment and collection at indirect taxes are easy because they are paid in small amounts, the payers hardly over take note of the amount of tax they pay.
3- Indirect taxes do not affect disincentive to work negatively, they may instead encourage the tax payer to work harder so that he can buy these goods which have become more expensive because of the imposition of indirect tax.
4- Indirect taxes are more flexible than direct taxes . they can easily and quickly change
S5) Indirect taxes may be used to restrict the consumption of harmful or undesirable goods
6) Indirect taxes can be used to protect home industries from competition from foreign firms.

Disadvantages of Indirect Tax.

1) Indirect taxes are regressive, that is they take a higher proportion of tax from the poor than the rich.
2) Taxation, especially indirect taxes, has direct effect on press taxes therefore leads to inflation
3) Heavy taxation may reduce the ability to save and invest.
4) Taxation changes the distribution of income progressive taxes reduce the gap the rich and the poor while regressive taxes widens the gap.
5) Taxation has several effect on consumption. Direct taxes reduce disposable income and consumption. Indirect taxes by raising prices reduce demand for goods and services.

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