Advantages and Disadvantages of taxes
Before we delve into the full details of the advantages and disadvantages of taxes, let’s explain the major two types of taxes,
Types of Taxes
As highlighted in our previous note, there are two major types of taxes. They are direct and indirect taxes
- Direct Taxes: These are taxes that are directly paid to the government by the taxpayer. Direct taxes are levied on individuals and organisations directly by the government e.g. income tax, corporation tax, wealth tax etc. The payer of this tax bears the burden directly and easily.
Types of direct taxes
I. Company tax: This is also called corporate tax, it is the tax levied on the profits made by a company.
II. Capital tax: This is the tax levied on property or on capital asset like cars, land, personal houses etc. When a tax is levied on the properties of a dead person, it is called “death duty” and it is paid by the person who inherited the properties of the deceased person.
III. Poll tax: This type of tax is operated on a flat rate basis usually imposed on the income of some individuals. It is a flat tax levied on every citizen of a region for the purpose of raising money for the government.
IV. Expenditure tax: This is the tax levied on the part of a person’s income which is actually spent.
V. Capital gain tax: This is the tax levied on the gains or profits derived from the sale of land and other capital asset.
VI. Personal income tax: This is the tax levied on income of an individual usually during a period of one year. In Nigeria, the personal income tax is based on Pay As You Earn (P.A.Y.E) i.e. people are allowed to pay according to what they earn as income.
Advantages of direct taxes
I. they are easy to estimate and collect
II. They are not inflationary
III. It helps to reduce the inequality of income
IV. They are collected at low cost to the government
V. They are convenient to payers based on their ability to pay
VI. Certainty: 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.
Disadvantages of a direct tax
I. It reduces the purchasing power of the payer
II. Easy to evade: Except through PAYE system, payers of direct tax can submit a false return of income and thus evade the tax.
iii. Direct taxes may discourage saving and investment
iV. Direct taxes may cause social conflict
V. Direct taxes may reduce motivation level on tax payers
- Indirect Tax: These are taxes resulting from manufacturing or sale of goods and services. They are taxes collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer)
Indirect taxes are levied on goods and services, the producers or sellers bear the burden at first before transferring to the consumers.
Types of indirect tax
a. Sales tax: This is the type of tax levied on the sale of a certain commodities, it is collected either at the wholesale stage or retail stage and it is passed to the consumers through increase in the prices of goods.
b. Purchase tax: This is the tax levied on certain consumer’s commodities such as cars, machines, television set etc., and this tax is usually collected at the wholesale stage.
c. Value added tax (VAT): This is the type of tax that is imposed on goods and services at each stage of production. The final burden is usually carried by the consumers.
d. Custom duties or tariffs: These types of taxes are grouped into two, these are: .export duties and import duties. Export duties: These are taxes levied on the goods that are sent out (exported) to other countries; it is paid by the exporter and the import duties which are the tax levied on goods that are brought into the country from other countries, they are paid by the importer.
Advantages of indirect taxes
a. They help to check the importation of harmful commodities
b. They serve as a source of revenue to the government
c. They help to protect the infant industries
d. They help to correct balance of payment deficit
e. They are not easy to evade or avoided
f. Indirect taxes through custom duty and tariff, are used to protect importing countries from being used as dumping ground for inferior goods
Disadvantages of indirect tax
a) They are inflationary in nature
b) They increase the prices of commodities
c) They are difficult to estimate
d) They could lead to industrial unrest
e) They are not economical, as they attract high cost of collection
f) They bring uncertainty in revenue generation