Why the share of Direct Taxes should be more in any economy?
Developed economies have greater share of direct taxes than indirect taxes in total tax collections by the States.
“Direct taxes help in redistribution of the income”.
Suppose a person A earns 5L INR per annum & pays direct tax (income tax) of A%.
There is another person B who earns 20L INR per annum & pays B% as a tax where B>A.
So, more tax is collected from B than A. Hence, it is redistribution of income.
Same applies for firms too (as they pay Corporate tax).
Therefore, direct taxes promote equality (*as more tax is deducted from people who earn more as compared to those who earn less).
The case of Indirect Taxes:
Indirect taxes are paid “in equal amount” by all. So, increasing the indirect taxes directly affects the life of people in the lowest strata of the society while it hardly affects the life of affluents.
Therefore, indirect taxes are regressive in nature.
Less indirect taxes promote trade & commerce by reducing the cost of production & services rendered.
Hence, in any economy, the share of direct taxes must be more than the indirect taxes in tax collection of the State.
With Great Love,
Er. Amit Yadav