Direct tax: Difference between revisions

There is no consensus among the academic literature to designate if direct taxation is more efficient or not. Earlier works based on static models favour direct taxation whereas the recent literature, based on neoclassical growth models, shows that indirect taxation is more efficient. The conclusions of these debates are that the answers are mostly conjectural, depending on the economic structure.<ref>{{Cite book|last=Tresch|first=Richard|title=Public Finance: A Normative Theory (third edition)|publisher=Elsevier|year=2015|pages=220-221220–221|edition=third}}</ref>

Moreover, direct taxation are transfers which can have a redistributive preoccupation (combined with the will of increasing tax revenue).<ref name=":2">{{Cite journal|last=Canceill|first=Geneviève|date=1985|title=L'effet redistributif de l'impôt direct et des prestations familiales|url=https://www.persee.fr/doc/estat_0336-1454_1985_num_177_1_4976|journal=Économie et Statistique|volume=177|pages=23-3923–39|doi=10.3406/estat.1985.4976}}</ref> Indeed, taxation is a main tool of the redistributive function of the government identified by [[Richard Musgrave (economist)|Richard Musgrave]] in his ''The Theory of Public Finance'' (1959). A progressive direct taxation could participate in the reduction of inequalities and correcting difference in living standards among the population.<ref name=":2" />

Another effect of a progressive direct taxation is that such tax structure act as automatic stabilizers when prices are stable. Indeed, when incomes (in the example of a progressive income tax) decrease, as a result of recession, the average tax rate is reduced – individuals have to face lower tax rates because their earnings and their incomes have been reduced. And similarly, when incomes are increasing, the average tax rate increases also.<ref name=":3">{{Cite book|last=Stiglitz|first=Joseph|title=Economics of the public sector (third edition)|publisher=Norton & Company|year=2000|location=New York|pages=455-466455–466|edition=third}}</ref> This mechanism of progressive taxation participates to the stabilization of the economy, another function of the government in the works of Musgrave (stabilization branch of the government which prevents major fluctuations in real GDP). When incomes fall, tax revenues fall too (and in the case of progressive taxation, even tax rates drop also) reducing tax burden on taxpayers.