Direct taxes are fully attributable to an individual’s income. They are usually levied in the form of graduated bands (progressive percentages) on profits and other forms of income.
They can even address inflation by moderating the demand for goods and services. Examples include income tax and capital gains tax.
Indirect taxes, on the other hand, are borne by individuals other than those generating the income. The business owner therefore acts as a collection agent from the consumer.
These taxes contribute to inflation by raising the prices of consumer purchases. Examples of indirect taxes are Value Added Tax (VAT) and customs duty.
The concept of equity in taxation seeks to bring more fairness into the system. Therefore, a high-income individual would pay a higher aggregate proportion of his income in taxes, while a low-income earner could even be exempt from direct taxes.
The idea is that a person enjoying more spending power can contribute more to the public coffers than someone who is living hand-to-mouth.
High indirect taxes disproportionately affect the poor by taking away more of their already constrained spending power.
If a punitively high tax rate on top income earners can be called a 'Robin Hood tax', then high indirect taxes are effectively all about taking money from the poor to fund the excesses of government.
These excesses range from financing lavish lifestyles for elected and appointed officials all the way to alleged corruption scandals that have been littering the news.
An increase in the price of fuel raises more than commuting costs.
The ripple effects are felt on food prices and throughout industry, due to the impact on logistics. This decreases the global competitiveness of the economy by raising the costs of exports.
With debt service crossing 60 per cent of government revenue, these taxes are a product of necessity.
Verily, it is better to take away the purchasing power of the citizenry openly than to sneak behind their backs and resort to printing money, eroding their wealth at a catastrophic pace.
