Presentation on theme: "“ Public finance ” course First term 2010/2011 Instructor Dr. Mo’een Rajab E.mail: Palestine University Finance."— Presentation transcript:
“ Public finance ” course First term 2010/2011 Instructor Dr. Mo’een Rajab E.mail: Palestine University Finance and business college
Lecture Seven Direct & Indirect Taxes
Economists and Classification of Taxes: Economists usually classify taxes into (i) Direct taxes and (ii) Indirect taxes.
Concept of Direct Tax: Direct tax According to Dalton, a Direct tax is really a tax which is paid by a person on whom it is legally imposed and the burden of which cannot be shifted to any other person is called a direct tax.
J.S.Mill direct tax J.S.Mill defines direct tax as "one which is demanded from the very persons who, it is intended or desired, should pay it." The person from whom it is collected cannot shift its burden to anybody else.
Thus, the impact, i.e., the initial or first burden, and the incidence, the ultimate burden of a direct tax is on the same person The tax payer is the tax bearer. income tax For example, income tax, is a direct tax.
Concept of Indirect Tax: indirect tax An indirect tax, on the other hand, is a tax the burden of which can be shifted to others. Thus, the impact and incidence of indirect taxes are on different persons.
indirect tax An indirect tax is levied on and collected from a person who managers to pass it on to some other person or persons on whom the real burden of the tax falls.
Tax payer and tax prayer: Hence, in the case of indirect taxes, the tax payer is not the tax bearer. Commodity taxes are generally indirect taxes as they are imposed on the producers or sellers but their incidence fills upon the consumers, as such taxes are wrapped up in the prices.
The gist of distribution thus lies in its shifting. A tax which cannot be shifted is direct; and on which can be shifted is indirect. Through the conventional distinction between direct and indirect taxes is logical enough, it very difficult to apply it in practice.
It presupposes a fairly good knowledge of the particular behavior of the people regarding tax payments, Unless we know whether a taxis shifted from the immediate tax payer to someone else, we cannot categories it as direct or indirect.
Further, difficulties arise when a taxis partially shifted and partially borne by the person on whom it is imposed. Does it mean that half the tax is direct, and half indirect? Certainly not.
To this difficulty, as raised by Prof. Prest, we may answer that the possibility of shifting in any degree should be regarded as the criterion of deciding an indirect tax. And lack of any shifting is to imply a direct tax.
basis of assessment Many modern writers, however, distinguish between direct and indirect taxes on the basis of assessment, rather than on the point of assessment.
Taxes are generally assessed on the basis of income received or expenditure incurred. Hence, taxes which are based on income are called direct and those which are levied on outlays are called indirect taxes.
Types of Direct Tax: In the group of direct taxes: Income tax wealth tax property tax estate duties capital gains tax capital levy may be included
while, commodity taxes or sales tax excise duties customs duties etc. indirect taxes may be grouped as indirect taxes.
MERITS OF DIRECT TAXATION The following advantages of direct taxes are commonly pointed out:
1- Equity Direct taxes, like income tax, wealth tax, etc. are based on the Principle of ability to pay, so the equity or justice in the allocation of tax burden is well secured by these taxes.
A horizontal equity A horizontal equity is maintained by taxing persons in a similar economic situation at the same rate, so also a vertical equity in direct taxation is maintained by discriminating between tax payers according to their differing economic standing.
2- Progressive. Usually direct taxation is progressive in effect. Since direct taxes can be designed with fine gradation and progressiveness, they can serve as an important fiscal weapon of reducing the gap of inequalities in income and wealth.
Direct taxes thus lead to the objective of social equality. Death duties and inheritance taxes are unique in this respect.
3- Productive. Direct taxes are elastic and productive. Revenue from direct taxes increases or decrease automatically with the change in the national income or wealth of the country.
4- Certainty: The canon of certainty is perfectly embodied in direct taxation.
5- Economy: economy The canon of economy is also well maintained under direct taxation. Direct taxes like income tax etc. being collected annually in lumpsum, the administrative cost of such collection will be minimum as compared to the indirect taxes like sales tax, excise duties, etc., which are collected at short intervals (usually, quarterly), and which involve a high cost of collection.
Demerits of Direct Taxation
Disadvantages of Direct Taxes Direct taxes, however, have the following disadvantages
1- Pinching: Since taxes are to be paid in a lumpsum they pinch the tax payers more. Thus, the announcement effect of a direct tax always tends to cause resentment among the tax payers.
2- Inconvenient: Direct taxes do not conform to the canon of convenience as returns of income tax, wealth tax, etc, are to be filed in time and complete records are to be maintained up to date by each individual tax payer.
3- Evasion and Corruption : Since the assessment of direct taxes depends upon the voluntary declaration of the tax:
Thus, in fact, under direct taxation, honesty is taxed while dishonesty is rewarded. Tax evasion in effects leads to corruption also.
4- Uneconomical: Direct taxes are so economical as they are claimed to be. They are uneconomical when the tax base is narrow.
Further, an elaborate machinery is required for their collection as each' and every assessee has to be contacted individually and properly checked to prevent tax evasion. Nevertheless, it must be permitted that direct taxes are generally more productive of revenue than indirect taxes. Moreover, indirect taxes, too, are uneconomical in this respect.
5- Narrow-Based. Direct taxes are generally narrow based: therefore, a large section of masses remains untouched and to that extent, they fail to achieve their objective of promoting civic sense among the citizens. Especially, the poor section of the community remain untouched under direct taxes.
6- Arbitrary: The nature and base of direct taxes are arbitrarily decided by the exchequer. The finance Minister uses his own value judgments in determining the taxation potential of the tax payer. There is no scientific formula or base for evolving the mode of gradation and progression in direct taxation.
7 - Disincentiveness: Direct taxes being based on income and wealth, if they are excessive may discourage savings and kill the incentive to work hard.
In evaluating all these demerits, we may, however, find that they are the result of administrative difficulties and inefficiencies rather than any economy principle.