Forms of Tax: Advantages and Disadvantages

There are two major forms of tax. Direct and Indirect taxes. Direct tax is collected directly from individuals and profits of companies. The profit of direct tax is borne by the payers.

Types of Direct Tax

1. Income Tax

This is a compulsory contribution imposed on the personal income of individuals based on their gross income and depends on the total income, the family size of the payer, etc.

2. Company Tax

It is levied on the companies that operate in a particular country.

3. Profit Tax

Every firm pays tax based on its profit.

4. Capital or Property Tax

It is levied on the assets or properties of individuals including the assets of the deceased.

5. Airport Tax

This is a form of direct tax paid by those who travel with aeroplane within and outside the country.

6. Miscellaneous Direct Taxes

There are other petty taxes such as poll, expenditure, educational, development, cattle, surtax etc. These taxes come in one form of levy or the other like the one they called Survival levy in Imo State of Nigeria in 1984 after the demise of the second republic.

Forms of Income Tax

1. Proportional Tax

This is a form of income tax in which everybody, irrespective of the income, pays a fixed amount.

2. Progressive Tax

This income is also known as Pay As You Earn (PAYE); the percentage levied as tax increases with the size of one’s income.

3. Regressive Tax

In this case, the proportion removed as tax from one’s income decreases as the person’s income increases.

Advantages of Direct Taxes

1. They Are Progressive in Nature

The percentage levied as direct tax increases with the size of one’s income which is the most ideal form of tax.

2. They Avoid Cheating

A person must be seen and assessed before imposing on him what he should pay as a tax; it is never done by proxy.

3. The Incidence of Direct Taxes is Easy to Ascertain

The tax payer for example, of income tax bears the final burden.

4. They Are Used To Control Inflation

Increase in direct taxes in a period of inflation will contribute immensely in reducing the volume of money in circulation thereby combating inflation in the country where it occurs.

5. They Are Based On One’s Ability to Pay

This is more possible when incomes are progressively taxed.

6. They Are Used in Redistributing Incomes

The progressive nature of direct taxes helps to redistribute incomes because, the more the income of an individual, the more he pays as tax.

7. They Are Easy to Calculate

Once the number of income earners are known, income tax can be calculated.

8. Government’s Total Revenue From Taxes Can Easily Be Estimated

This is normally estimated from income tax.

9. Payers Find Them Convenient To Pay

This is because they know when, how and where to pay them.

10. They Arouse Civic Consciousness

Payers of direct taxes are aware that they are doing so and they do so with amount of civic responsiveness.

Disadvantages of Direct Taxes

1. They March Cause Deflation

When they are high, they reduce the volume of money in circulation than the available goods and services thereby, causing deflation.

2. They Discourage Savings

What may be left after paying direct taxes may not encourage any form of savings.

3. They Bring About Personal Squabbles

This is because their collection involves personal contact.

4. Direct Taxes Reduce People’s Purchasing Power

This is more pronounced with income tax that reduces the income of workers.

5. Discouragement of Hard Work

The workers may feel that hard work will lead to more income which on the other hand will attract more tax, which they may consider as unprofitable exercise.

6. They March Cause Disincentive to Invest

When company and profit taxes are high, they discourage investment.

7. They Are Difficult to Assess

This concerns profit tax because, firms declare false profits.

8. Cases of Evasion Is High

People do not pay them until they are confronted or they have need for tax clearance certificates.