Taxation Question - Direct and Indirect Tax

Fo87

Hi,

I'm trying to write an essay for my tax module in college and would be interested to know people's opinion on what is the appropriate balance between direct and indirect taxes?

Thanks, all suggestions welcome.

Mr. Incognito

You'll have to be more specific.

In the tax industry indirect taxes is the trade name for VAT so you'd want to be careful expressing what you are looking for here.

Fo87

The topic is a little ambiguous I know and I'm finding it hard to decide where the balance lies, i'm just going by the question we were asked by our lecturer.

But basically, I'm trying to analysis whether it is better to increase VAT rates and excise duties, placing more reliance on indirect taxes as a source of income for the government as opposed to raising income tax. I read a report by PwC saying there is a global shift towards indirect taxes and considering the government has increased VAT and other indirect taxes in the last budget, it would appear we are following that trend. I'm just not sure if this is the best option or does it provide a balance?

Should the government be relying more on income tax or VAT? I mean if people aren't spending then relying on VAT is bad, indirect taxes are more regressive, it also effects people with lower incomes more but on the other hand its easier to collect, provides an incentive to save, gives people choice, governments can change it according to their circumstances......????

Maybe there isn't an appropriate balance at all, maybe there will also be someone who is going to be unhappy.

Mr. Incognito

hmmm,

Interesting subject. It's an economic question really. If you are talking about what is the appropriate balance it depends on the economic model you are applying it to.

The question is really what is the appropriate balance for the Government to apply to maximise the tax intake. This is subjective and depends on the governments own agenda.

Broadly speaking though if you have an imagined country with high retail sectors and a booming tourist economy you would think VAT is the way to go (ignoring the minority that will claim it back)

If you have a low retail sector and lots of employment your balance should be geared through PAYE.

There is no magic formula, you have to have a look at the economy and adjust accordingly. For example property has gone down the tubes here. Is there a point in increasing stamp duty? No- you cut it to stimulate growth in that sector.

There reason there is a global shift towards indirect taxation is as you say, it is easier to collect and people don't really see the tax when they are buying goods- they just see the gross price whereas look the uproar caused by 1% increases in health levies compared to the increase in VAT.

If I was doing your essay I'd make up four countries with different model economies and apportion a subjective tax approach to them based on the different economies- hope that's food for thought mate. Best of luck with it.

censuspro

Direct taxes are taxes on income i.e. income tax/

Indirect taxes are a consumption tax i.e. VAT.

Ireland during the past 10 years or so chose the latter with low taxes on income and high taxes on consumption. This works well when people are spending however when people stop spending the government has no tax revenues and is forced to higher direct taxes which is what we witnessed in the last budget.

djk1000

In my opinion, higher indirect taxes lead to people heading over the border to do the shopping and tourists being in shock when they see the prices here (leading to a bad perception of Irish value as a holiday destination). Direct taxes are more fair in my opinion, as you can tax proportionately based on income, but higher direct taxes don't get politicians elected!

Fo87

Thanks for your input people , all very interesting and it seems there is arguments what ever direct governments take. This essay might be a work in progress for a while.