When a Government has to resort to taxation to raise resources. welfare will be increased if the revenue is ought to be raised through direct taxation income tax rather than indirect taxation sales tax or excise duty If a person pays income tax instead of the same amount as a sales tax on the purchase of a commodity he can still purchase the combination of goods he prefers the most out of the combinations available to him. The sales tax tends to reduce his purchases. A sales tax or excise duty distorts prices Rom their optimum levels and forces the consumer to reallocate his expenditure among commodities in a less desirable fashion. On the other land the income tax only reduces his over all purchasing er but us not directly affect the relative prices. It does Dot, therefore. force him to readjust his expenditure.
There no doubt that income tax also affects he tax paler s behavior but it docs not distort his consume on pattern it only distorts his income earning plans. It may affect his will to work and save. However duties have their own merits. They are anti inflationary and fallow those who have a large propensity
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