Advantages of Direct Taxes:
Direct and indirect taxes have advantages of their own.
Direct taxes have some merits and so have the indirect taxes.
Direct taxes have the following advantages in their favour:
The burden of direct taxes cannot be shifted. Hence equality of sacrifice can be attained through progression. Of course, the very low incomes can be exempted. This cannot be achieved- by taxes on commodities which fall with equal force on the rich and the poor. The tax raises the price of the commodity, and the price of a commodity is the same for every person, rich or poor.
The cost of collection of direct taxes is low. They are mostly collected “at the source”. For instance,-the income tax is deducted from an officer’s pay every month. This saves expense. The employer acts as an honorary tax collector. This means great economy.
In the case of a direct tax, the payers know how much is due from them and when. The authorities also know the amount of revenue they can expect. There is certainty on both sides. This minimises corruption on the part of collecting officials.
If the State suddenly stands in need of more funds in an emergency, direct taxes can well serve the purpose. The yield from income tax or death duties can be easily increased by raising their rate. People cannot stop dying for fear of paying death duties.
Another virtue of direct taxes is that they are very productive. As a community grows in numbers and prosperity, the return from direct taxes expands automatically. The direct taxes yield a large revenue to the State.
(vi) A means of developing civic sense.
In the case of a direct tax, a person knows that he is paying a tax, he feels conscious of his rights. He claims the right to know how the Government uses his money and approves or criticizes it. Civic sense is thus developed. He behaves as a responsible citizen.
Disadvantages of Direct Taxes:
The great disadvantage of a direct tax is that it pinches the payer. He ‘squeaks’ when a lump sum is taken out of his pocket. The direct- taxes are thus very inconvenient to pay. Nobody can help feeling the pinch.
The assessee can submit a false return of income and thus evade the tax. That is why a direct-tax is “a tax on honesty.” There is a lot of evasion. Many of those who should be paying taxes go scot-free by concealing their incomes.
If taxes are progressive, the late of progression has to be fixed arbitrarily; and if proportional, they fall more heavily on the poor. Thus, both are bad. The rate of taxes depends upon the whim of the Finance Minister. This is arbitrary.
If the taxes are too heavy, they discourage saving-sand investment. In that case the country will suffer economically. A high level of taxation discourages investment and enterprise in the country. It inflicts a lot of damage, on business and industry.