(a) Distinguish between direct and indirect taxes. (b) What are the advantages of direct taxes?

Answer Details

(a) Direct versus indirect taxes. A direct tax is a tax levied directly on the income or property of a person or organisation, where the person on whom it is imposed also bears the burden and pays it directly to the government. A indirect tax is a tax levied on goods and services, so that it is paid in the first place by producers or sellers but its burden can be shifted onto the final consumer through higher prices.

(b) Advantages of direct taxes:

• Equity (fairness): they can be made progressive, so that those with higher incomes pay a larger proportion, spreading the burden according to ability to pay.
• Certainty: the taxpayer knows how much to pay and when, and the government can estimate the revenue fairly accurately.
• Economical to collect: collection costs are relatively low because the tax is paid directly, often through employers.
• Elastic: revenue rises automatically as incomes rise, so the government's income grows with the economy.
• Reduces inequality: by taking more from the rich, it helps to narrow the gap between rich and poor.
• Does not directly raise prices: because it is not added to the price of goods, it does not by itself push up the cost of living.
• Civic awareness: since taxpayers feel the tax directly, it can make them more conscious of, and interested in, how public money is used.