Explain five disadvantages of using direct taxes to raise government revenue. (10 marks)

Disadvantages of using direct taxes to raise government revenue

Disadvantages of using direct taxes to raise revenue include:

1. Direct taxes are very unpopular with the citizenry.
   The burden of paying this tax is borne directly by the individual taxpayer and is paid at once or even in advance.
2. 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.
3. 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.
4. 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. 
5. Reduced ability to save and invest.
   Direct taxes take away money from the citizens hence reducing their purchasing power causing low investments.
6. 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.
7. May encourage capital flight.
   Foreign investors may conceal their profits in order to transfer such earnings to other countries.

Public Finance Form 4 Level

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