Answer to Question #166502 in Microeconomics for Godfred Duodu

Question

Since all taxation transfers income from the population to the state, it does not matter if the transfer is through direct taxes on incomes, or indirectly by taxes on goods and services. Discuss?

Answer 1

Direct taxes are mandatory non-transferable payments supposed to be payed by individuals and legal entities to the government. They are a liability to the individual and the entity. They include income tax commonly known as pay as you earn(P.A.Y.E.), land rates among others.

Indirect taxes are payments made by consumers and are passed to them by sellers and made when purchasing a commodity.

All these payments lead to movement of money from the public to the state accounts. They therefore reduce the income made by individuals and businesses.

The money is then pooled together irregardless of whether it was paid directly or indirectly and from that pool the state terms it as total revenue. The revenue is treated as the same and used to service the country's budget.

Any money collected as tax irregardless of the means is a transfer of income from the population to the state.

In Adam Smith's book The Wealth of Nations, "taxation transfers wealth from the households to a country's government or authority."