Wealth Tax etc. A tax is said to be indirect whose burden is shiftable from the tax payers tosome other person e.g., Salea Tax, Amusement Tax, Excise Duty etc.Further in Direct Tax impact and incidence fall on the same person. The tax payer himself hasto pay the money from his own pocket. The burden of such a tax cannot be shifted either backward or forward.So, the basis of classifying taxes into direct and indirect is the shiftability of tax. Choice betweendirect and indirect taxes is difficult. They have theit respective merits and demerits.
Merits of Direct Taxes
Firstly, generally the rate of tax increases as Income or value of property increase indirect taxation. That is such taxes are progressive in character. Those who aresupposed to have higher ability to pay are required to do so.Secondly, such taxes can be used for redistribution of income and wealth. Thedisparity between the income of different income groups and of inherited wealthcan be reduced by a graded system of Direct Taxes.Thirdly, such taxes are economical and easy to collect. The cost of collection is notvery high.Fourthly, the prayers pay such taxes consciously. He gets enough time for itspayment. Lastly, such taxes are highly productive. They bring more revenue to thepublic Authorities.
A direct tax is not a rose without thorns. It has its blemishes too. They are supposed tohave a positive disincentive effect on work, income and savings. It is but quite naturalthat people may not like to work hard and earn more if they are forced to pay off a largepart of hard earned income. Similarly, people may get disincentive to invest in buildingand property if inheritors are to pay high death duties.Secondly, heavy burden and not being shiftable, such taxes may create a desire toevade them by payers. This may create black wealth and unaccounted income.Public revenue is likely to be less.Thirdly, the tax axe falls more heavily on salaried class who cannot conceal theirincome while those who earn excessive windfall income like trader, business men,speculators can conceal their income. This is unfair and unjust. The total burden of such tax falls on a small percent of population and a vast majority could remainoutside tax net.