State two merits and two demerits of direct taxes.
A) Merits:
1. Equity:
A direct tax is an equitable tax. Through it, the rich can be made to pay more than the poor. In case of necessity, the poor people can be granted exemption from payment of such taxes.
A direct tax is equitable in the sense that it is levied according to the taxable capacity of the people. The rates of direct taxes, like the income tax, can be fixed in such a way that the higher the income of a man, the greater is the rate at which he has to pay the tax. Such a system is known as progressive taxation.
2. Certainty:
A direct tax satisfies the canon of certainty. For instance, a person liable to pay income tax knows how much he will be required to pay; for that purpose, he can appropriate steps beforehand.
(B) Demerits:
These are:
1. Lack of Popularity:
First, such taxes are not very popular, because people have to bear the burden of such taxes directly. That is why, when the rate of a direct tax is raised, most people express their resentment against the government. For instance, when the rate of personal income tax or corporate profit tax is raised, criticism from those affected becomes very strong.
2. Evasion:
The second disadvantage of a direct tax is that it is liable to be evaded. By submitting false returns, many people try to evade income tax. Unless the civic sense of the people is well — developed and there is spread of education among them, the administration of direct taxes is very difficult.
A) Merits:
1. Equity:
A direct tax is an equitable tax. Through it, the rich can be made to pay more than the poor. In case of necessity, the poor people can be granted exemption from payment of such taxes.
A direct tax is equitable in the sense that it is levied according to the taxable capacity of the people. The rates of direct taxes, like the income tax, can be fixed in such a way that the higher the income of a man, the greater is the rate at which he has to pay the tax. Such a system is known as progressive taxation.
2. Certainty:
A direct tax satisfies the canon of certainty. For instance, a person liable to pay income tax knows how much he will be required to pay; for that purpose, he can appropriate steps beforehand.
(B) Demerits:
These are:
1. Lack of Popularity:
First, such taxes are not very popular, because people have to bear the burden of such taxes directly. That is why, when the rate of a direct tax is raised, most people express their resentment against the government. For instance, when the rate of personal income tax or corporate profit tax is raised, criticism from those affected becomes very strong.
2. Evasion:
The second disadvantage of a direct tax is that it is liable to be evaded. By submitting false returns, many people try to evade income tax. Unless the civic sense of the people is well — developed and there is spread of education among them, the administration of direct taxes is very difficult.
