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
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.