Taxation Case

After examination of the various taxes that exist (direct and indirect), and relating them to various countries (Barbados, United Kingdom and India), it cannot be concluded that any particular type of tax is indeed better than the other, in fact there should be a blend of both for a tax system to be effective and a well-balanced one. It is acknowledged that there are quite significant advantages and disadvantages to the both types of taxes, as well as very persuading arguments for the use of one over the other in a tax system.

However, the key determinants of which taxation methods to use in a country's tax system is based on firstly the size of the country's economy. This is a significant factor as if a country's economy is a small one, it may be wiser to have greater emphasis on indirect taxes. This is because a lower direct tax rate will result in greater disposable income, which will result in greater spending in the economy. The government will use this spending to generate revenues through indirect taxation and these revenues generated may be greater than or proportionate to that of the taxes that are generated by direct and other forms of taxes. This was reflected in the revenues of Barbados in 2003 generated by tax. The total tax generated in this year totaled $993.4 million with the indirect taxes accounting for $548.8 million or 55.2%.

A second factor a country must consider when designing its tax scheme is the aim of government and policy that it wishes to pursue. If a government wishes to contract the economy, they may want to increase direct taxes. This is so as they will want to create a situation in which each individual have a lower disposable income to spend. This will result in less expenditure in the economy and resulting in contraction. On the flip side, if they wish to expand the economy, they may wish to utilize indirect taxes more. They may wish to decrease the direct taxes and increase that of indirect taxes. This is because it is of the assumption that indirect taxes do not bear much impact on an individual's spending patterns and therefore, if they lower direct taxes to allow more disposable income in the economy, they can gain more revenues in the indirect taxes such as VAT and excise duties. This increase in revenues can then be used in turn to invest in the economy in the form of establishment of new industries and expanding others.

Therefore, no type of tax can be said to be greater than the other as they both can be used as fiscal tools to influence the economy but which types and blends to use depends on the aims of government and what strategies they are willing to use to influence the economy.