17.2          ndian    onom
                                                                  higher tax payer getting no government services
                                                                  and a lower tax payer getting all the services. Here
     Modern economics defines tax as a mode of                    income looks re-distributed from the consumption
     income redistribution.1 There might be other ways            side.
     also to look at it—the usual meaning of tax people
     think is that a tax is imposed by the government to          inciDence of tAx
     fulfil its important obligations on the expenditure
     front.2 We may take an example to see how taxes              The point where tax looks as being imposed is
     redistribute income:                                         known as the incidence of tax—the event of tax
           Suppose an economy has a flat rate of income           imposition.3
     tax 30 per cent. Just see the impact of this tax
     on the income disparity of two people A and B                imPAct of tAx
     earning Rs. 50,000 and Rs. 80,000, respectively.             The point where tax makes its effect felt is known
       Indivi-    Nominal      Income       Income       Income   as the impact of tax—the after effect of tax
        dual      Income      Disparity       after     Disparity
                                before      Paying      after Tax
                                 Tax          Tax
                                                                  Direct tAx
      A          Rs. 50,000                Rs. 35,000
                             Rs. 30,000                Rs. 21,000
      B          Rs. 80,000                Rs. 56,000             The tax which has incidence and impact both at
           We see here through the above-given Table              the same point is the direct tax—the person who
     as how the income disparity between two                      is hit, the same person bleeds.5 As for example
     individuals A and B decreases from Rs. 30,000                income tax, interest tax, etc.
     to Rs. 21,000 after paying taxes—this is the first
     level when incomes of these individuals have got             inDirect tAx
                                                                  The tax which has incidence and impact at the
           Now the money the government has got
                                                                  different points is the indirect tax—the person
     by tax collection, i.e., Rs. 39,000 (Rs. 15,000 +
     Rs. 24,000) will be spent on different sectors—              who is hit does not bleed6 someone else’s blood.
     infrastructure, education, health etc.—which will            As, for example, excise, sales tax, etc., are imposed
     provide services to each and everybody alike. Here           on either the producers or the traders, but it is the
     income is re-distributed at the secondary level.             general consumers who bear the burden of tax.
     Consider a person who pays income tax, but does
     not take services of government schools for his                 MeThods of TaxaTion
     children’s education, nor goes to the government
     hospitals for medical services and compare him               There are three methods of taxation prevalent
     with a person who has no option other than                   in economies with their individual merits and
     the government schools and the hospitals—the                 demerits.
         1.  P.A. Samuelson and W.D. Nordhaus, Economics, (New
                                                                     3.  Samuelson and Nordhaus, Economics, pp. 75–77.
             Delhi: Tata McGraw Hill, 2005), p. 327.
                                                                     4.  Ibid., pp. 75–77.
         2.  For further reference, J.E. Stiglitz and C.E. Walsh,
             Economics, (New York: W.W. Norton & Company, 2006),     5.  Ibid., p. 329.
             pp. 378–79.                                             6.  Ibid., p. 329.