Advantages of Direct Taxes.
- Indirect taxes are comprehensive or broad based and they are almost distributed in all corners of the economy.
- Payments for indirect taxes tend to be convenient and easy to the tax payer.
- Unlike direct taxes; indirect taxes may not easily be evaded.
- Indirect taxes don't have a great discincentive on Enterprise and effort since they are levied on peoples expenditure and not income.
- Indirect can be raised to discourage consumption of harmful products as a means of improving peoples health.
- Most indirect taxes are difficult to avoid.
- Indirect taxes can be used to stabilized the economy through
- Ensuring a favourable B.O.P. position.
- Indirect taxes are more impartial as they don't discriminate i.e. even they poor or foreigners pay as long as they consume taxed supplies.
- Indirect taxes are certain in terms of revenue collected e.g excise taxes.
- Revenue raised from indirect taxes helps to avoid high direct taxes and hence it reduces the indisicentive effect of direct taxes.
- Indirect taxes are simple and easy helps to collect as they involve minimal paper work.
- Since indirect taxes are hidden in prices, they are not easily noticed hence not politically resented by consumers unlike direct taxes.
- Indirect taxes may be used to improve terms of trade by taxing certain imports and thus reducing demand for them.
- High import duties may be used to protect infant industries and also discourage dumping.
- Disadvantages of indirect taxes:
- Indirect taxes are regressive thus they make the poor to pay more than the rich hence can't redistribute wealth in society optimally.
- Most indirect taxes are inflationary as the burden is shifted to the consumer in form of high price e.g. VAT.
- They are not very certain as they are hidden in prices hence the tax payer does not know how much he is to pay.
- A country's revenue may be affected if people avoid the consumption of the commodity taxed.
- High import duties may discouraged the industries that depend on imported inputs.
- It is not easy to determine the incidence and impact of an indirect tax.
- They are not impartial. i.e. they lack the principle of fairness as they don't consider peoples incomes in relation to peoples burdens.
- They interfere with consumer's sovereignty and at times force the consumers to consume poor quality but low taxed goods.
- Most indirect taxes are uneconomical as the cost of collection is too high comparatively.
- Indirect taxes leads to resource misallocation. i.e. resources may be re - directed towards only those areas where taxes are less, while key sectors may be avoided.