Tax Classifications

Direct tax:
A direct tax is a form of tax is collected directly by the government from the
persons who bear the tax burden. Taxable individuals file tax returns directly to
the government. Examples of direct taxes are corporate taxes, income taxes,
and transfer taxes.
Indirect tax:
An indirect tax is a form of tax collected by mediators who transfer the taxes to
the government, and also perform functions associated with filing tax returns.
The customers bear the final tax burden. Examples of indirect taxes are sales
tax and value added tax (VAT).
There are other types of taxes, which may either be direct tax or indirect taxes,
including capital gains tax, corporation tax, consumption tax, inheritance tax,
property tax, excise duty, retirement tax, tariffs, wealth tax or net worth tax, toll
tax, and poll tax.
9.4 Purposes and effects
Money provided by taxation have been used by states and their functional
equivalents throughout history to carry out many functions. Some of these
include expenditures on war, the enforcement of law and public order,
protection of property, economic infrastructure (roads, legal tender,
enforcement of contracts, etc.), public works, social engineering, and the
operation of government itself. Governments also use taxes to fund welfare and
public services. These services can include education systems, health care
systems, and pensions for the elderly, unemployment benefits, and public
transportation. Energy, water and waste management systems are also common
public utilities. Colonial and modernizing states have also used cash taxes to
draw or force reluctant subsistence producers into cash economies.
Governments use different kinds of taxes and vary the tax rates. This is done to
distribute the tax burden among individuals or classes of the population
involved in taxable activities, such as business, or redistributing resources
between individuals or classes in the population. Historically, the nobility were
supported by taxes on the poor; modern social security systems are intended to
support the poor, the disabled, or the retired by taxes on those who are still
working. In addition, taxes are applied to fund foreign aid and military
ventures, to influence the macroeconomic performance of the economy (the
government’s strategy for doing this is called its fiscal policy – see also tax
exemption), or to modify patterns of consumption or employment within an
economy, by making some classes of transactions more or less attractive.

A nation’s tax system is often a reflection of its communal values or/and the
values of those in power. To create a system of taxation, a nation must make
choices regarding the distribution of the tax burden—who will pay taxes and
how much they will pay—and how the taxes collected will be spent. In
democratic nations where the public elects those in charge of establishing the
tax system, these choices reflect the type of community that the public and/or
government wishes to create. In countries where the public does not have a
significant amount of influence over the system of taxation, that system may be
more of a reflection on the values of those in power.
The resource collected from the public through taxation is always greater than
the amount which can be used by the government. The difference is called
compliance cost, and includes for example the labour cost and other expenses
incurred in complying with tax laws and rules. The collection of a tax in order
to spend it on a specified purpose, for example collecting a tax on alcohol to
pay directly for alcoholism rehabilitation centers, is called hypothecation. This
practice is often disliked by finance ministers, since it reduces their freedom of
action. Some economic theorists consider the concept to be intellectually
dishonest since (in reality) money is fungible. Furthermore, it often happens
that taxes or excises initially levied to fund some specific government programs
are then later diverted to the government general fund. In some cases, such
taxes are collected in fundamentally inefficient ways, for example highway
tolls.
Since governments also resolve commercial disputes, especially in countries
with common law, similar arguments are sometimes used to justify a sales tax
or value added tax. Others (e.g. libertarians) argue that most or all forms of
taxes are immoral due to their involuntary (and therefore eventually
coercive/violent) nature. The most extreme anti-tax view is anarcho-capitalism,
in which the provision of all social services should be voluntarily bought by the
person(s) using them.
9.5 The Four “R” s
Taxation has four main purposes or effects: Revenue, Redistribution, Reprising,
and Representation.
The main purpose is revenue: taxes raise money to spend on armies, roads,
schools and hospitals, and on more indirect government functions like market
regulation or legal systems.
A second is a redistribution. Normally, this means transferring wealth from the
richer sections of society to poorer sections.
A third purpose of taxation is reprising. Taxes are levied to address
externalities: tobacco is taxed, for example, to discourage smoking and a
carbon tax discourages the use of carbon-based fuels.
A fourth, consequential effect of taxation in its historical setting has been
representation. The American revolutionary slogan “no taxation without
representation” implied this: rulers tax citizens and citizens demand

accountability from their rulers as the other part of this bargain. Studies have
shown that direct taxation (such as income taxes) generates the greatest degree
of accountability and better governance, while indirect taxation tends to have
smaller effects.