Direct vs indirect taxes

All the developed countries tax the income (direct taxes), rather than the expenditure (indirect taxes).
Reason: It is easier to introduce tax slabs or progressive taxation rates so that the rich pay a higher proportion of their income as taxes. The poor spend a higher portion of their income on food and basic necessities while the rich are able to save and reinvest bulk of their surplus. Hence by taxing good and services the country ends up taxing poor more than the rich. VAT discourages consumerism, and hence slows down economic growth.

However it’s easier for an underdeveloped/developing society to tax the goods than income. The reason behind that is to be effectively able to collect direct taxes you need a sound financial reporting and auditing else there will be pilferage. What is worse is that there will be a situation like it exists in India where the middle/service class end up paying a much higher percentage of their income as taxes than the rich who through hiding their income or via various tax shelters hardly pay any.

One of the important learning/change in viewpoint that happened after my stay in France is that now I understand how the corruption rots the entire system and makes the society worse off. Sometimes end does not justify the means and corruption is one of the instances.



3 thoughts on “Direct vs indirect taxes

  1. @nisha…
    I am trying to write a detailed post on corruption.. will elaborate it in it.

    the bulk of the taxes are collected via income tax (which is quite high) and only a small percentage of taxes are collected via indirect taxes.. plus their vat credit is valid across states.. so in reality the burden is not too much


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