While nobody likes doing their taxes, it’s something you have to do to keep the government running like a well-oiled machine. Taxes may be direct or indirect. Direct taxes are paid out by businesses and individuals on the basis of their income or earnings and cannot be legally avoided. Indirect taxes on the other hand are a little different, they are levied on goods and services which in turn bumps up their costs. One may avoid paying indirect taxes by simply controlling what one purchases. Adam Smith was famous for putting forth the “Canons of Taxation” in his celebrated book Wealth of Nations.

Canon of equality
The canon of equality states that everyone should pay their fair share of taxes. Therefore, those who are more fortunate and earn more will need to pay a higher tax than someone who earns less.

Canon of certainty
The canon of certainty states that taxes should be certain and definite to the respective tax payers. Nothing should be left to chance and there should be no ambiguity. As such, taxes and tax slabs are decided well in advance and this gives clarity and ample time to the taxpayer.

Canon of convenience
This states that mode of payment should be easy and convenient for the taxpayer. This will encourage the tax paying citizen to do his taxes on time. Pay as you earn allows the company to deduct taxes from salaries and remit it to the government account.

Canon of economy
The canon of economy states that cost of collecting taxes shouldn’t exceed the taxes themselves. Therefore, it would not be prudent to impose taxes that are difficult to administer. Let us examine some of the advantages of direct taxes.

Equal distribution of wealth
Taxes tend to be progressive, i.e., the rich are made to pay more taxes than the poor. This allows for redistribution of income and reduces income inequality. The tax money collected is spent on welfare schemes and on the poor, which also helps in reducing the crime rate.

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Inflation and savings
Direct taxes can be increased to reduce demand for goods and as a result bring down inflation. This will affect people’s ability to purchase too many goods and services. If the government wants to boost investments, it may reduce taxes so people can save more money and invest more.

Let us now examine the advantages of Indirect taxes.

Easy to collect
These taxes are easy to collect and determine the incidence of an indirect tax.

Discourage certain behavior
By heavily taxing tobacco and alcohol, the government can discourage harmful behavior like smoking and excessive alcohol consumption

Choice
Consumers have a choice, they don’t have to pay indirect taxes. They can simply forgo on buying unnecessary products or services.

Anti-inflationary measure
If they want to bring down inflation, they can heavily tax goods and services. Therefore, these taxes can be used as an anti-inflationary measure.

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