Advantages and Disadvantages of Indirect Taxes
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Advantages and Disadvantages of Indirect Taxes

Advantages and disadvantages of Indirect Taxes Advantages of Indirect Taxes Indirect taxes have advantages of their own. Briefly speaking they are as under:— 1. They are the only means of reaching the poor. It is a sound principle that every individual should pay something, however little, to the State. The poor are always exempted from paying direct taxes. They can be reached only through indirect taxation.

Advantages and Disadvantages of Indirect Taxes

Advantages of Indirect Taxes

Indirect taxes have advantages of their own. Briefly speaking they are as under:—

1. They are the only means of reaching the poor. It is a sound principle that every individual should pay something, however little, to the State. The poor are always exempted from paying direct taxes. They can be reached only through indirect taxation.

2. They are convenient to both the tax-payer and the State. The tax-payers do not feel the burden much, partly because an indirect tax is paid in small amounts and partly because it is paid only when making purchases. But the convenience is even greater due to the fact that the tax is "price-coated". It is wrapped in price. It is like a sugar-coated quinine pill. Thus, a tobacco tax is not felt when it is included in the price of every cigarette bought. It is convenient to the State as well which can collect the tax at the ports or at the factory. A dealer collects the tax when he charges a price. He is an honorary tax collector.

3. Indirect taxes can be spread over a wide range. Very heavy direct taxation at just one point may produce harmful effects on social and economic life. As indirect taxes can be spread widely, they are more beneficial and suitable.

4. They are easy to collect. Collection takes place automatically when goods are bought and sold. They cannot be evaded, as they are a part of the price. They can be evaded only when the taxed article is not consumed, and this may not always be possible.

6.  They are very elastic in yield, if imposed on necessaries of life which have an inelastic demand. Indirect taxes on necessaries yield large revenue, because people must buy these things.

7.  When imposed on luxuries or goods consumed by the rich, they are equitable. In such cases only the well-to-do will pay the tax.

8.  They check consumption of harmful commodities. That is why tobacco, wine, beer and other intoxicants are taxed.

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Disadvantages of Indirect Taxes

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

1. They are regressive. Indirect taxes are not equitable. For instance, salt tax in India fell more heavily on the poor than on the rich, as it had to be paid at the same rate by all. Whether a rich man buys a commodity or a poor man, the price in the market is the same for all. The tax is wrapped in the price. Hence, rich and poor pay the same amount, which is obviously unfair.

They are uncertain in yield unless necessaries are taxed. In the case of goods with an elastic demand, the tax might not bring in much revenue. The tax will raise the price and contract the demand. When the thing is not purchased, the question of the tax payment does not arise.

2.  They cause the price of an article to rise by more than the tax. A fraction of the money unit cannot be calculated, so every middleman tends to charge more than the tax. The process is cumulative.

3. They are uneconomical. The cost of collection is quite heavy. Every source of production has to be guarded. Large administrative staff is required to administer such taxes. This turns out to be a costly affair.

4.  They do not develop civic- consciousness, because often the tax-payer does not even know that he is paying a tax. The tax is concealed in the price.

5. They discourage industries if raw materials are taxed.

Sin Taxes

Many local cities and states are including what are called sin taxes. But what is a sin, smoking that has already been mentioned. But now local governments are including taxes on anything that has chocolate, because it is unhealthy, which of course is ridiculous. And recently, local governments are imposing taxes on anything that has sugar in their ingredients. That sure covers a large amount of food, though they have limits on the amount of sugar, all in the guise of fighting obesity. The government is continually finding ways to tax everyone without requiring a vote on raising taxes.

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