Economics 11 Notes for Economics Notes

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Direct Tax

Meaning of direct tax

The taxes imposed in income, profit and properties are called direct taxes. The person or organization which faces the incident taxes the burden of the tax. The tax is not shift able in nature and is paid by the payers who really take its burden. The payers know how much they are paying at what rate and on what basis. Therefore, this tax is inconvenient and hence unpopular type of tax. But it is a very effective tool applied for price stability, redistribution of income and wealth, economic stability, reallocation of resources etc.

Advantages of direct tax

1. Certainty:
There is certainty in collection of tax from direct tax. The government can easily estimate the amount of tax that it can collect in the coming fiscal year.

2. Based on ability to pay:
The direct taxes are imposed on the basis of “ability to pay” of the people and organization. The people and business organizations earning more profit, income pay more taxes than the counterparts.

3. Uniform:
The people and business organization belonging to a certain group are imposed equally. Rate of tax is uniform in all places and to everyone.

4. Economic:
Bearing little cost of collection, huge amount can be collected. Less time and manpower is required for tax collection.

5. Educative:
The payers of direct tax know how much they are paying, why should they pay and whether the government is utilizing the money or not.

6. Re distributive:
Direct tax is very useful to redistribute income and wealth if there is high inequality. For it, the rich people are imposed taxes in income, profit and properties heavily and the amount collected is used for the benefit of the poor people.

7. Anti-inflationary:
If there is inflation, the government absorbs the money with people increasing direct tax rate. It helps to control the increase in aggregate demand and rise in price level.

8. Reallocate:
The direct tax is helpful to reallocate the resources from non or less desirable sector to more desirable sector. For it, the government imposes more profit tax in the profit earned from the production of such non or less desirable product like tobacco, alcohol etc.

Disadvantages of direct tax

1. Inconvenient:
The payers of direct tax know how much they are paying on what basis or on what rate per unit of time they are paying. The direct taxes are paid in large amounts. Therefore, the payers feel inconvenience or burden.

2. Less flexible:
Only if the direct tax is decreased, it is welcomed and accepted by large number of people. When it is increased the government may encounter serious political pressure.

3. Unpopular:
The direct tax is unpopular tax. It is inconvenient and less flexible. It is not diversified like indirect tax. Due to direct tax, the government may encounter serious political pressure too.

4. Corruption:
In order to evade the payment of large amount of direct tax, the officials and political leaders are offered bribes.

5. Anti-productive:
The direct tax may be anti-productive. It is because its imposition makes people not to work hard. There may be decrease in production, investment and income generation.

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