ADVANTAGES OF DIRECT TAX

a. It is progressive in nature because it administered with graded scale

b. It is non-inflationary: it does not lead to an increase in the general price
level
c. It reduces income inequality as the poor pay less than the rich.
d. It is easy to estimate the revenue expected from direct tax.
e. It is cheap to collect: The cost of collecting the tax is usually very small
f. It is convenient to tax payers
DISADVANTAGES OF DIRECT TAX
a. It reduces savings
b. It reduces investment
c. It is easy to evade
d. It acts disincentive to work
e. It reduces the disposable income of individuals
ADVANTAGES OF INDIRECT TAX
a. It generates more revenue to the government
b. It is cheap and easy to collect.eg custom duties
c. It has wider coverage than direct tax
d. It is not a disincentive to work
e. It is used to discourage the consumption of harmful goods
f. It is used to prevent dumping
g. It is not easy to evade as consumers pay as they consume the product.
h. It is used to correct balance of payment deficit
DISADVANTAGES OF INDIRECT TAX

a. It is regressive in nature
b. It is inflationary in nature because it can lead to an increase in price
c. The revenue generated from it is uncertain
d. It discourages investment
e. It could lead to industrial unrest
PRINCIPLES OF A GOOD TAX

1. Equity: This principles ensures that tax is levied on each person according to his
ability to pay.
2. Economy: The principle of economy states that the cost of tax collection should
be cheap relative to the revenue yield.
3. Convenience: This states that the time and method of tax payment should be
convenient to the payer
4 Certainty: The tax payers should be aware of what,when,where and how to
pay the tax
5. Flexibility: The tax system should be easy to adjust based on the current
situation in the economy
6. Neutrality: The tax system should not have any side effects. That is, it must not
disrupt production and consumption, the supply of labour and the demand and
supply of goods and services.
7. Simplicity: The tax system should not be difficult to understand and administer

SYSTEMS OF TAXATION

a. Progressive tax: This is also known as pay as you earn (PAYE); it is a tax
system where the percentage of tax increases with the size of the income. This can
be illustrated in the diagram below:

tax rate

Income

b. Regressive tax: A tax system is regressive when the tax rate decreases as income
increases. In this case, the higher the income of a consumer,the lower the tax
rate.This can be illustrated in the diagram below:

tax rate

Income
c. Proportional tax: This is a tax system in which the same percentage of tax or
amount is paid irrespective of the income.This can be illustrated in the diagram
below:

tax rate

Income

INCIDENCE OF TAXATION:
This refers to where the final burden of tax rest or lies.
TYPES OF INCIDENCE OF TAX

a. Formal incidence:This refers to the initial burden tax on the tax object, that is,
the tax payer.For direct tax, the initial incidence rest directly on the direct tax
payer. For indirect tax,the producer bears the initial burden of tax.
b. Effective incidence:This refers to the person who bears the ultimate or final
burden of tax. For direct tax, the burden of tax may rest on the producer or
consumer depending on the elasticity of demand of the commodity.
i. The incidence of tax when demand is perfectly inelastic falls on the consumer
ii. Incidence of tax when demand is perfectly elastic falls on the producer because
any attempt to increase the price will lead to a fall in demand to zero.
iii. Incidence of tax when demand is fairly elastic or inelastic is shared between the
producer and the cosumer.
iv. Incidence of tax when demand is unitary elastic is shared equally between the
producer and consumer.

REASONS WHY GOVERNMENT IMPOSES TAX

1. To generate revenue for the government
2. To check the consumption of harmful goods
3. To control inflation and stabilize prices which reduces aggregate demand
4. To influence the consumption and production pattern in the desired way
5. To protect and encourage the development of infant industries
6. It is used as a retaliatory weapon in international trade
7. To avoid dumping

MATHEMATICAL APPROACH TO TAXATION

The following terms should be noted for proper understanding and calculation on
taxation:
a. Tax base: This refers to the object taxed. It includes Personal income import,
export, company profit tax.
b. Tax rate: This refers to the percentage of the tax base which is paid as tax

Tax rate = tax payment x 100

Tax base
c. Disposable income: This is personal income minus tax

The table below shows the tax payment of three income earners in a year. Use the
information in the table below to answer the questions that follow:

Income earners Income/Tax base($) Tax payment

X Y
Mr. Okafor 10,000 1,000 800
Mr. John 15,000 1,500 1,300
Mrs Rita 30,000 3,000 1,500

1(a). Determine the tax rate paid paid by the following:

i. Mr Okafor in Column X and Y

ii. Mrs. Rita in Column Y

iii. Mr. John in column X and Y

b(i) Identify the system of taxation employed in column X and Y

ii. Which of the income earners has the least burden or incidence of tax in
column Y
c. If the government increases its tax rate to 20%, how much revenue will be
generated from the tax payers

d. At 20% flat rate of tax, calculate the disposable income of Mr. Okafor,John and
Mrs. Rita.