Direct and Indirect taxes are two different types of tax that a government may impose in order to achieve some of its objectives. Direct tax is a tax on the earnings of consumers and producers such as an income tax. Indirect tax, however, is a tax on expenditure such as a Value Added Tax on all goods and services. The main difference between the two types of tax are that a direct tax is collected directly from the owner of it whereas an indirect tax is collected by an intermediary from the consumer.Macroeconomic aims of the government are the central aims that the government of a country will try to achieve and usually consists of having a low and stable rate of inflation, having a high employment rate, having a high real economic growth and maintain a stable balance of payments/trade.
A reduction in taxation will cause consumers to have more disposable income as less of their total income is taken by the government.This will likely lead to an increase in aggregate demand, increasing economic growth as production increases and also lowering unemployment as more production caused by a rise in consumer demand will create more jobs for the population. Taxes are a portion of the earnings and expenditure of the general public given taken by the government in order for it to achieve some of its objectives. Governments impose taxes for many reasons, but one of the most important reasons is to correct and prevent the market failure of the under-provision of public and merit goods and services such as street lighting by providing public goods and services for the benefit of the public. Another reason would be to redistribute wealth among the population which is normally done through progressive tax systems. Also, a government can use tax to help it achieve its macroeconomic goals as rates of taxation can influence aggregate demand.
As well as this, a government could impose taxes to undermine de-merit goods by placing high taxes on them and forcing their prices up. This can help to reduce demand for de-merit goods such as drugs and alcohol. Another factor that taxation can affect is the environment. A government may impose taxes on activities that are harmful to the environment and thus lowering the amount of pollution and damage caused to the environment. The distribution of income is a way to measure the equality in incomes that individuals in an economy receive.
It can also be seen by the range of incomes earned by people in an economy. The government can use taxation as a method to influence the distribution of income in an economy. The major tool that a lot of governments use to achieve this objective is a progressive tax system. This is a direct tax that increases as a percentage as an individual’s income increases. This can help to redistribute income in an economy as people on higher incomes who can afford to pay high taxes must pay a larger proportion of their income in tax to the government and people on lower incomes are allowed to keep a greater proportion of it.
The government can then use the tax revenue gained from those on higher incomes and redistribute this through transfer payments or other methods. However, a reversed effect of this can be created through the use of a regressive tax system whereby the proportion of income taken as tax decreases as income increases. This essentially means that a greater proportion of income is taken as tax from those on lower incomes. This can cause the generally unwanted effect of increasing the inequality of income distribution and widening the gap between the rich and the poor.
Finally, there is also a proportional tax system where the tax rate as a percentage of income is not affected by the amount of income being received by an individual. There is a ‘universal’ tax rate that applies to all people regardless of their income. This generally does not affect the distribution of income too much however, the government may still redistribute some of their tax revenue to people on lower incomes to help the distribution of income.
