Merits and Demerits of Direct Taxes

Merits of direct taxes:

• Equity — direct taxes (especially a progressive income tax, where the rate rises as income rises) are based on the taxpayer's ability to pay, so they distribute the tax burden more fairly across richer and poorer taxpayers.
• Certainty — the taxpayer knows in advance how much tax is due, and when, making it a relatively predictable levy for both the payer and the government.
• Elasticity — as national income grows, direct tax revenue tends to grow automatically along with it (especially under a progressive structure), giving the government a naturally elastic source of revenue.
• Creates civic consciousness — because the taxpayer feels the burden directly and personally, direct taxes tend to make citizens more aware of, and more interested in, how public money is spent and government policy.
• Reduces inequality — a progressive direct tax structure, combined with government welfare spending funded by it, helps narrow the gap between the rich and the poor over time.

Demerits of direct taxes:

• Possibility of evasion — because the burden is felt directly and cannot be shifted, some taxpayers are tempted to conceal income or otherwise evade paying their full direct-tax liability.
• Inconvenient — the taxpayer has to go through return-filing, assessment, and payment procedures, and must set aside a lump sum (or periodic instalments) specifically for tax, unlike an indirect tax that is paid in small amounts each time a purchase is made. …