Comparison of Direct and Indirect Taxes

There are several parameters on which the direct and indirect taxes can be compared. Firstly, direct taxes are progressive and they help to reduce inequalities but indirect taxes are regressive and they widen the gap of inequalities. Thus, direct taxes result in more equitable distribution of income and wealth, though it might not be always true. Secondly, direct taxes are narrow based so their collection is easier; but indirect taxes are broad based, so administration costs to collect them is comparatively higher. Thirdly, in comparison to direct taxes, the indirect taxes affect the purchasing power of the people more. In other words, direct taxes only remove the enhanced purchasing power of the tax payers. On the other hand, the indirect taxes affect poor people more brutally. Fourthly, in terms of the economic growth, indirect taxes are more growth oriented in comparison to direct taxes. Direct taxes are progressive and they reduce savings and investments. When saving and investments are discouraged, economic growth is more likely to be affected. In contrast, the indirect taxes discourage consumption and increase savings. The sin taxes for example discourage consumption of inconspicuous items and promote health, which has indirect effect on economic growth.