Direct tax & indirect taxes : Relative superiority:
Saving: In Indirect taxation, tax base is spending and incomes and hence, the result will be curtailment of consumption more and of saving less than in the case of direct taxation. As against this indirect taxation encourages saving by discriminating the valuation of goods in favour of future consumption.
Substitution in consumption: With increase in incomes, expenditure on luxury consumption of goods increases rapidly with heavy excise duties on then for example their sustainability saving becomes high. Hence when indirect taxes rise price of those luxury articles, savings are encouraged. Again when consumers are subjected to money illusion they continue to buy the commodities of the pre-tax money value and hence they still to the same amount of money spending even when tax increased rise in price have reduce the commodity worth of money.
Capital formulation: It is held that income tax can be instrumental to saving and capital formulation if savings are exempted from tax. However goods points out exemption of saving from income tax will increase private capital formulation only on the assumption that saving habit are directly related to the size of income and that high income are high savers. On the whole, it may be said that incentive to invest is less adversely affected by indirect taxation than by income taxes when we taken into account all the relevant factors.
Influence on stabilisation: Keynesian argue that progressive takes are less effective in controlling inflation since they fall more on the rich and hence, reduce consumption less than in the case of Indirect tax. It follows that indirect taxes collected mostly from lower income groups curtail the consumption expenditure more than an equal yield proportional income tax. If as a result of tax the curtailment of demand for goods & services in more than that of supply for them, the tax is anti-inflationary. From this point of view, indirect taxes are more efficient then direct taxes.
Distributional aspect: It is commodity held that direct taxes have a built mechanism to achieve redistribution of income in the society in favour of poorer classes. The bases argument is that direct taxes can be made supply progressive requiring the rich to pay taxes at higher rates than the rate of income while allowing at low income levels. The tax proceeds may be spent by the public authority on schedule which will directly benefit the poorer sections. As against the indirect taxes fall more heavily on the poor since they are regressive & hence of income going by the way to taxation will be more for smaller. It is therefore held that indirect taxes, instead of reducing inequality of income, increase the gap between poverty & prosperity.
Administrative aspect: Cost of collection of indirect taxes is smaller than the case of direct tax. Indirect taxes are collected not from the innumerable buyers of goods & services but from the businessman & whole sellers. As against this, direct taxes require that each every taxpayers accounts should get scrutinised. This is a gigantic task. A large number of employee are necessary. Moreover, the income or other direct tax laws & procedure of tax payment. There is no such complexity in the administration of indirect taxes.
