(a) Tax: “A complusory contribution from a person to the government to defray the expenses incurred in the common interest of all without reference to special benefits conferred.” In other words, taxes are compulsory payments to government without any corresponding direct return of services or goods by the government to the tax payers. 

Merits of Direct Taxes: 

1. Economical—Direct taxes are economical in the sense that cost of collecting these taxes is relatively low as they are usually collected at source and they are paid to the government directly by the taxpayers.

2. Certanity—Direct taxes satisfy the canon of certainty. The tax payers know how much they have to pay and on what basis they have to pay. The government also knows fairly, definitely the amount of tax revenue it will receive. Thus, the direct taxes satisfy the canon of certanity. 

Demerits of Direct Taxes: 

1. Unpopular—Direct taxes are directly imposed on individuals. They cannot be shifted. Tax payers feel their pinch directly consequently. They are not popular among the people. 

2. Possibility of Tax Evasion—Direct taxes encourage tax evasion. People conceal their income from the tax officials so as to pay less taxes. In India, there is large-scale evasion of income tax on the part of businessmen. They adopt fradulent practices to save themselves from paying taxes. 

(b) Inflation: “A state in which the value of money is falling, i.e. price are rising.” In other words, Inflation is a rise in price levels with additional characteristics or conditions. It is incompletely anticipated; it does not increase to further rises, it does not increase employment and real output; it is faster than some safe rate; it arises from the side of money, it is measured by prices net of indirect taxes and subsidies; and/or it is irreversible. 

Effect of Inflation on: 

1. Fixed Income groups—This includes pensioners, government servants owners of government securities and promissory notes and others who get a fixed money income. They are known as rentiers. This class is worst affected by inflation because the purchasing power of their fixed income goes on decreasing with rising prices. 

2. Producers—During inflation, the producers and businessmen gain in the short period. Usually the cost of production does not rise as fast as the price of their product and so there is an artificial margin of profit. As against this they may also be effected adversely on the long run. If the price level goes on increasing, the total consumption of their product would fall. The reduced consumption will ultimately rise the cost of production per unit and reduce the profits.