Types of Taxes

Basically, there are two types of taxes i.e. direct taxes and indirect taxes. However, there are further types of direct and indirect taxes. A brief list of both the major taxes is as under:

Types of Direct Taxes

• Proportional taxes
• Progressive taxes
• Regressive taxes
• Digressive taxes

Types of Indirect Taxes

• Specific taxes
• Advalorem taxes
• Value added taxes

Direct Taxes

The taxes for which the burden of taxes cannot be transferred are called direct taxes. According to H. Dalton, “A direct tax is really paid by the person on whom it is legally imposed.” Income tax, wealth tax, property tax, etc are examples of direct tax.

Indirect Taxes

The taxes for which the money burden can be transferred to others are called indirect taxes. Sales tax, customs duty, excise duty, etc are examples of indirect tax.

We make a comparison of direct and indirect taxes as under:

“The direct and indirect taxes are like two attractive sisters between which a person is bound to remain indifferent.”

Professor Gladstone,

Difference Between Direct and Indirect Tax

Direct Tax	Indirect Tax
The imposition is direct	The imposition is indirect
Imposed on personal income and revenues	Imposed on the sale and purchase of goods and services
The impact burden is just on one person	The incidence burden is on different persons
The burden cannot be transferred to someone else	The burden is transferred to some other persons
Charged by the taxpayer at certain intervals like a year. After the payment, the taxpayer is listed off	Neither is charged in intervals nor the taxpayer is listed off. It is charged while acting certain acts that of purchase, etc

Types of Direct Taxes

Proportional Taxes

This taxation system is advocated by classical economists. If a uniform tax rate is imposed on all levels of income and no difference is made between the high-income groups and low-income groups, it will be known as a proportional tax.

It is imposed on all the income groups with the same proportion. e.g: If in a country, the tax rate is 10% then all the persons have to pay 10% tax irrespective of their incomes.

Progressive Taxes

The progressive tax is one whose rate goes on to increase along with an increase in income. Any change in income leads to a change in the tax rate. There is a positive relationship between income and tax rate. The tax rate on higher income is higher and on lower-income is lower.

In such a system, the individual income is divided into different slabs, and the rate of income tax is different for each slab. Along with the increase in income the slab as well as tax rate change.

Regressive Taxes

It is a tax rate that falls along with an increase in the incomes of the people. Thus, it is opposite to progressive taxes and there is a negative relationship between income and the tax rate. Moreover, in such a taxation system, the poor have to scarify more than the rich. A general sales tax is an example of a regressive tax.

Digressive Taxes

This is a soft type of progressive tax where the tax rate does not increase in the same proportion as an increase in income. The tax rate increases up to a specific level of income and beyond that level, the tax rate remains constant. Therefore, it can be said that it is a combination of proportional and progressive taxes.

Types of Indirect Tax

Specific Taxes

When any good or service is taxed on the basis of its measure, size, and weight, such tax is given the name of a specific tax.

For example $5/- per meter of cotton cloth etc. The main advantage of specific taxes is that these can be easily imposed and charged.

Anyhow, these are not beneficial because they are burdensome for the poor.

Advalorem Taxes

When any commodity is taxed on the basis of its value, such tax is given the name of advalorem tax. I.e. A customs duty of 15% on a specific electronic product of value $50000 is an advalorem tax.

In such tax, we do not consider the weight or size of the product we just consider its value. It is beneficial in the sense that it lies the burden just on rich people. Anyhow, there is some difficulty to find the exact value of products as the producers do not show it in order to avoid taxes.

Value – Added taxes

Value–added tax is related to the family of sales tax. It is imposed on that value which is obtained by subtracting the purchase value of the product from the gross sale of the product.

In other words, the gap b/w the revenues of the firm and the cost of the firm which it has to face regarding inputs, etc. are known as value-added. A tax imposed on this value-added is called a value-added tax.

Merits and Demerits of Taxes

Taxes are important for the Govt to collect, as they are running the country. They need funds to improve the nation. These funds are collected in different taxes including direct taxes & indirect taxes. Each tax type has various Pros & Cons depending upon the tax nature.

These collected amounts are further invested in different mega-level projects including infrastructure, national trade, providing a subsidy, and generating employment opportunities.

What is direct Tax? Direct taxes is a form of tax imposed by a regulatory authority i.e., Govt of a country. These taxes are directly paid to govt of the payer. There are many advantages of direct taxes as well as disadvantages of taxes from the different payer and receiver perspectives.

Merits and Demerits of Indirect Taxes

Merits of Indirect Taxes

Imperceptible

Indirect taxes are imperceptible in the sense that these are paid frequently through consumption but these are not realized.

Convenient

These are convenient in the sense that we do not face any formality to pay them but these are paid by adding in the market value of the goods.

Wide Coverage

 These have a wide coverage because these are charged by all the income groups i.e. low, middle, and high. These are imposed on all types of goods i.e. necessities, comforts, and luxuries.

Elastic

These are elastic in the sense that these can be reduced on those goods whose consumption is to be increased and can be increased on those goods whose consumption is to be decreased by the government.

Less Dishonesty

There is no chance of dishonesty because indirect taxes are included in the prices of the commodities and no one can stop this consumption.

Diversity

There are in accordance with the canon of diversity because these are imposed on a variety of goods and services.

Promote National Interest

These taxes promote national interest because everyone is part of this network.

Check the Consumption of Harmful Commodities

The consumption of harmful commodities can be checked by this taxation system. The state imposes heavy duties on harmful goods i.e., cigarettes, etc.

Higher Tax Collections

The tax revenue may easily be increased by imposing heavy duties on inelastic goods whose demand does not reduce, whatever so is the price.

A powerful tool of eco-policies

Indirect taxes are used as a very powerful tool for economic policies.

Demerits of Indirect Taxes

Against Cannon of Equality

Indirect taxes are against the cannon of equity in the sense that the rich and poor have to pay the same rate of tax.

Against Cannon of Economy

These are uneconomical because the cost of tax collection is higher than its revenue. The taxed goods pass through a number of middlemen. Moreover, Govt. has to appoint highly paid staff.

Inflationary in Nature

These are inflationary in nature because the imposition of these taxes tends to raise the prices of commodities.

Lack of Civic Sense

The producers shift the burden of tax and the consumers ultimately bear the burden. The majority of consumers do not know that they are paying taxes and observing their national responsibility.

Uncertain Revenue

Revenue collection by indirect taxes is quite uncertain.

Bad Effect on Production and Employment

Sometimes, indirect taxes adversely affect the production of commodities and in turn employment. As with the increase in price, the quantity demanded shrinks and the economy moves toward depression.

Merits and Demerits of Direct Taxes

Merits of Direct Taxes

Equitable

Direct taxes are in accordance with the canon of equity. They are progressive in nature as their burden is equally distributed among the rich and poor. The rich pay more whereas the poor pay less. Thus, the burden is according to their income.

Certain

Direct taxes are in accordance with the canon of certainty as these are fixed at a certain rate and cannot be avoided.

Economical

These are in accordance with the canon of the economy as their cost of collection is low and maximum revenues can be collected with minimum cost.

Elastic

These are in accordance with the canon of elasticity. These are flexible in the sense that Govt. can increase or decrease its rates according to the requirements of an economy.

Simple

These are in accordance with the canon of simplicity as there is no confusion or complication in understanding them.

Desirable

These are desirable in nature and are imposed only on those persons who can afford them.

Reduce Inequalities

Direct taxes lead to an equitable distribution of wealth as these are progressive in nature. Rich are taxed heavily and vice versa.

Productive

These are productive in the sense that the revenue collected is mainly used by the Govt. in the public interest i.e. buildings, roads, hospitals, schools, etc.

Automatic Stabilizers

Direct taxes, especially income tax automatic stabilizers. During the boom phase of an economy, these tax the maximum number of individuals and vice versa.

Civic Sense

Direct taxes produce a civic sense among the people of a country. Taxpayers begin to recognize their civic responsibilities and start to take a keen interest in the activities of the state.

Demerits of Direct Tax

Along with the above-mentioned merits, direct taxes also have some demerits as well. A brief list of these demerits is as under.

Painful

Direct taxes are very painful for people in the sense that they face many hardships to earn their incomes but a big share of this income is paid in the form of tax. They get nothing from the Government against such taxes.

Dishonesty Promotes

To avoid the pain of the burden of direct taxes, the tax-payers conceal the facts which reflect their dishonesty.

Arbitrary Nature

There is an element of arbitrariness in direct taxes. These taxes leave much to the discretion of the taxation authorities.

Inconvenient

Due to certain unavoidable formalities, the payment of direct taxes is not so easy. Thus, direct taxes are inconvenient for taxpayers.

Discourage Saving and Investment

Direct taxes adversely affect saving and investment. It is because, the people know that if they invest more, they will have to pay more taxes. Direct taxes even discourage those industries and firms which produce essential goods.

Narrow-based

These taxes are imposed only on the selected group while the majority of the people remain untaxed.

Non-labor Income

It is desirable to impose the tax only on earned income. It should also be imposed on non-labor income.

Uneconomical

Generally, the collection of direct taxes is very expensive and real collection remains very low.

Discourage Foreign Investors

These taxes discourage the inflow of foreign investment.

In the Conclusion

The above discussion reveals that both the pillars of the taxation system are unavoidable and the Government must maintain a proper balance between direct and indirect taxes.