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Direct Vs. Indirect Taxation - Research Paper Example

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In the research paper “Direct Vs. Indirect Taxation” the author analyzes the optimal level of taxation for the government. It is very difficult for any government to decide on the optimal level of taxation and the medium used to collect these taxes…
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Direct Vs. Indirect Taxation
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"Direct Vs. Indirect Taxation"

Download file to see previous pages In order to assess our argument it would be important for us to know the difference between direct and indirect taxation.  Direct taxes are those taxes that are levied on one’s income. They are calculated annually and a certain percentage is levied on the earnings of a person. Similarly, indirect taxes or not levied on the people’s income. Instead, indirect taxes are paid on the purchase of goods and services. They are paid whenever a purchase is made. They are included in the selling price of a good and service and hence a person cannot escape indirect taxes since he is paying not only the price of the good or service, but also the portion of a tax. Hence it is unavoidable and is paid by everyone irrespective of his earning. (McConnell)We can use the above definitions to classify the federal income tax and federal sales tax into one of the two classes of taxation. This would help us in determining which is more useful in terms of revenue for the government and welfare of the society. Since we know that federal income tax is levied on people’s income and is calculated annually, we can classify it as a direct tax. This means that it is levied on the person’s income. It is a progressive tax where the rich person pays a higher amount than a person who is earning lesser than that person. On the other hand, federal sales tax is levied on the purchase of goods and services. People pay this type of tax only when they buy or sell something. It is not charged on the person’s income and it is a regressive tax meaning....
Hence it is unavoidable and is paid by everyone irrespective of his earning. (McConnell) We can use the above definitions to classify the federal income tax and federal sales tax into one of the two classes of taxation. This would help us in determining which is more useful in terms of revenue for the government and welfare of the society. Since we know that federal income tax is levied on people’s income and is calculated annually, we can classify it as a direct tax. This means that it is levied on the person’s income. It is a progressive tax where the rich person pays a higher amount than a person who is earning lesser than that person. On the other hand, federal sales tax is levied on the purchase of goods and services. People pay this type of tax only when they buy or sell something. It is not charged on the person’s income and it is a regressive tax meaning that both rich and poor pay equal amount of tax if the selling price of a good is same for their purchases. In other words, we can differentiate between these two types of taxes by using mathematic equation. Income tax is charged on one’s income. It is a percentage of one’s income. Let’s suppose that the prevalent income tax rate in the United States of America is 20%. The calculation of taxes for the income will be the following: Income Tax = Annual Income * 0.25 Similarly, in case of an indirect tax such as federal sales tax, the calculation for the income tax will be the following: Tax = Selling Price of Commodity * Percentage of the Tax These two equations tell us that federal sales tax has nothing to do with the income of a person. It is calculated just by looking at the value of the purchase that the person is ...Download file to see next pagesRead More
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