Taxes

 A tax (from the Latin taxo) is a compulsory financial charge or some other type of levy imposed upon a taxpayer (an individual or legal entity) by a governmental organization in order to fund various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law.

Kinds of taxes:

Taxes maybe

1) Proportional

2) Progressive

3) Regressive

4) Digressive

A proportional tax: is one that takes out of the pockets of every person exactly the same percentage of income. Such a tax is very simple and does not change the nature of the distribution of wealth in the country.

For instance, a tax on all incomes, big or small, at a flat rate of says 5%. But obviously poorer people with smaller incomes are hit harder in this system. Consequently, in modern taxation, proportional taxes have been given up in favor of progressive taxes.

A progressive tax: This tax tries to distribute the sacrifice in a more just manner. The higher incomes are changed tax at a higher rate. Since the marginal utility of money falls with its increase, richer people have a greater capacity to pay taxes. Besides, progression reduces inequalities in wealth to some extent. India has adopted it.

A regression tax: is one that is charged from the poor at a higher rate than from the rich. There is no justification for taxing higher incomes at a lower rate. This system is obviously unjust. It has only one thing in its favor and that is that as poorer people are more in number, such a tax brings in greater revenue. But regressive taxes are bad in principle and should be avoided as for as possible. In fact, they do not figure in the tax system of modern states e.g. land rent paid by poor people.

A digressive tax: is one that increases as incomes rise, but the rate does not increase in the same proportion as the income. It is so to say, a milder form of progression which means that larger incomes make a lower relative sacrifice than smaller incomes.

Direct and indirect taxes: Another distinction of no less importance is the one between direct and indirect taxes. Generally, taxes on income are direct and those on goods indirect.

A direct tax is one that is really paid by the person on whom it is legally imposed.

An indirect tax is imposed on one person but is paid partly or wholly by another (Dalton)

Advantages and disadvantages of direct taxes:

Direct taxes have the following advantages in their favor:

(i) Equitable: The burden of direct taxes cannot be shifted. Hence equality of sacrifice can be attained through progression.

(ii) Economical: The cost of collection of direct taxes is low. They are mostly collected at the source. The employer acts as an honorary tax collector. This means a great economy.

(iii) Certain: The payers know how much is due from them and when. The authorities also know the amount of revenue they can expect.

(iv) Elastic: The yield from income tax or death duties can be easily increased by raising their rate.

(v) Productive: As a community grows in numbers and prosperity, the return from direct taxes expands automatically. The direct tax yields large revenue to the state.

(vi) A means of developing civic sense: The taxpayer claims the right to know how the Government uses his money and approves or criticizes it. Civic sense is thus developed. He behaves as a responsible citizen.

Direct taxes have the following disadvantages in their favor:

(i) Inconvenient: It pinches the payer and thus very inconvenient to pay. Nobody can help to feel the pinch.

(ii) Evadable: The assessed can submit a false return of income and thus evade the tax.

Advantage and Disadvantages of Indirect Taxes:

Indirect taxes have advantages of their own.

(i) The poor can contribute: The poor are always exempted from paying direct taxes. They can be reached only through indirect taxation.

(ii) Convenient: They are convenient to both the tax-payer and the state.

(iii) Broad-based: As indirect taxes can be spread widely, they are more beneficial and suitable.

(iv) Easy Collection: collection takes place automatically when goods are bought and sold.

(v) Non-Evadable: They cannot be evaded as they are a part of the price.

(vi) Elastic: They are very elastic in yield if imposed on necessaries of life which have an inelastic demand.

(vii) Equitable: When imposed on luxuries on goods consumed by the rich, they are equitable.

(viii) Check harmful consumption: By being imposed on harmful products, they can check the consumption of harmful commodities.

Indirect taxes have some disadvantages too, which are as follows.

(i) Regressive: Indirect taxes are not equitable.

(ii) Uncertain: when the thing is not purchased, the question of the tax payment does not arise.

(iii) Raising price unduly: They cause the price of an article to rise by more than tax.

(iv) Uneconomical: The cost of collection is quite heavy.

(v) No civic consciousness: These taxes do not develop civic consciousness, because many times the tax-payer does not even know that he is paying a tax.

(vi) Harmful to industries: They discourage industries if raw materials are taxed.