Direct Taxation

The government is obliged to raise a very considerable revenue each year to meet the enormous costs of providing the services that the public has come to expect. The main source of government revenue is, of course, taxation. It also needs to raise money for capital expenditure, and the proper way of doing this is to borrow the required sums, repaying the borrowed money gradually over the years, and paying interest meanwhile. Nevertheless the government does not necessarily behave in this way - some current expenditure is financed out of money borrowed, by the issue of government securities to investors, which would be considered unsound practice in a commercial organisation. Indulged in by a government this action has the consequence of continually increasing the National Debt, which in turn means an ever rising liability of the government to pay interest to the lenders, which can only come from the pockets of the taxpayers of future generations.

Taxation takes two general forms. It is said to be direct when it is paid to the Inland Revenue directly by the person who bears the cost of it; and it is said to be indirect when the person originally paying the tax to the authorities recovers the cost by passing it on to somebody else. One example of direct tax is income tax: nobody can pass on the cost of his tax deductions to anybody else! An example of indirect tax is the duty payable on hydro-carbon oils: this is paid in the first instance to the authorities by the oil companies, but the cost of it is passed on to the consumers of the petrol and oil by adding it to the retail price.

In this section we shall discuss direct tax only, since in its commonest form of income tax the impact is felt by earners of incomes at the time of earning the income. Indirect tax, which we pay only when we spend money, not when we earn it, is dealt with in Part Four of this website.

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