I) Direct taxes are the ones that are directly taken from the outcomes of individuals or firms. This means that it’s the person or the firm that has the responsibility of paying the tax. Direct taxes include income taxes, inheritance taxes, corporation taxes on company profits and capital gains taxes due to properties or other values.
On the other hand, indirect taxes are the ones taken only indirectly from incomes spent on goods and services. This taxes can also be called expenditure or outlay taxes. Indirect taxes may include sales taxes, tariffs and the taxes added to the price of goods and services. Duties taxes on alcohol and tobacco are two examples.
The indirect taxes are imposed on the producers, but they usually pass a lot of the tax value to the consumers, by increasing the prices of their…show more content… This will lead to a rise in the market price because less products will be supplied at each price. II) A progressive tax assures that the proportion of income taken rises as the income increases. This means that the healthier people and firms will pay a higher proportion of their income in tax that those with lower incomes.
Progressives taxes are used by Governments to assure that those who have higher incomes can afford to pay higher taxes, and by doing this, the Government reduces the inequality in incomes. For example, for an annual income of $20,000, the tax paid will be $4,000 if a tax rate of 20% is applied, but if the annual income is $80,000, the tax paid will be $48,000 because the tax rate will be 60% instead of 20%.
On the other hand, a regressive tax assures that the proportion of income paid in tax falls as income rises. This means that if a firm has an annual income of $20,000, with a tax rate of 50% will pay $10,000 of tax, but a firm with an annual income of $80,000 will only pay $24,000 of tax because its tax rate will be