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Explain five disadvantages of using direct taxes to raise government revenue

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1. creates social conflicts:Since not everybody has to pay direct taxes, it is often responsible for creating social conflict amongst societies. It also leads to crimes, social injustice and a sense of inferiority among different groups of people..
2.Inconvenient:They are usually not in accordance with the canon of convenience. In order to submit the tax, a person has to undergo several formalities and procedures. Such inconvenience is also one of the important contributions factors in evasion of direct taxes.
3.Affects The Ability to Work and Motivation Level:As a tax payer, you know that the harder you work and generate more income, the more you will have to pay in direct taxes – usually, at an exponential rate, as it is in certain countries. Therefore, it dramatically affects your ability to work and motivation to excel..
4.Limits Capital Formations and Investment Opportunities:It is usually the elite class that invests their money and form capital within an economy. Since direct taxes are specifically applied on the elite class of people, it significantly limits the capital formation and investment opportunities in an economy. This, in turn, leads to higher unemployment and lower growth of economy.
5.Tax Evasion:It leads to tax evasion and corruption in a society. If the system is not water-tight, there is always a chance of tax evasion by manipulating the law and using subtle techniques. Moreover, the more blatant way is to suppress the profits by showing wrong statements of profits, which reduces the tax rate imposed on the person. Unlike indirect taxes, there is always a chance of tax evasion in direct taxes.

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The burden of paying this tax is borne directly by the individual taxpayer and is paid at once or even in advance.
Gives the taxpayer motivation to evade tax payment- The tax payer may come up with ways of concealing their income in order to avoid paying the tax or reduce the amount to be paid.
Non-consultation of taxpayers in the determination of the tax rate - The determination of the rate and amount of tax to be paid is at the discretion of the tax authorities.
Not an adequate source of government revenue - Most people in developing countries are low income earners hence limiting the amount of tax revenue from this source.
Reduced ability to save and invest - Direct taxes take away money from the citizens hence reducing their purchasing power causing low investments.
Tax payers are not involved in the expenditure of the tax revenue.
There is low civic involvement and call for government accountability since tax payers do not make decisions on government expenditure.

mawira morris answered the question on November 27, 2017 at 05:32

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Explain five disadvantages of using direct taxes to raise government revenue

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