What Is a Direct Tax?
A direct tax is paid by the taxpayer straight to the authority that levies it. With a direct tax, you pay it to the entity that imposed it. Examples include income tax, real property tax, personal property tax, and taxes on assets, all of which you as an individual taxpayer pay directly to the government.
Key Takeaways
You pay a direct tax as an individual or organization to the entity that levied it. Direct taxes include income taxes, property taxes, and taxes on assets. There are also indirect taxes, such as sales taxes, where the tax is levied on the seller but paid by you as the buyer.
The History of Direct Taxes
The modern distinction between direct taxes and indirect taxes emerged with the ratification of the 16th Amendment to the U.S. Constitution in 1913. Before that, U.S. tax law required direct taxes to be apportioned directly to a state’s population. For instance, a state with 75% of another state’s population would only pay 75% of the larger state’s direct tax bill.
This old rule meant the federal government couldn’t impose many direct taxes, like a personal income tax, because of apportionment needs. But the 16th Amendment changed that, allowing the government to levy various direct and indirect taxes.
Examples of Direct Taxes
Corporate taxes are a clear example of direct taxes. Say a manufacturing company reports $1 million in revenue, $500,000 in cost of goods sold, and $100,000 in operating costs—its EBITDA would be $400,000. With no debt, depreciation, or amortization, and a 21% corporate tax rate, it pays $84,000 directly ($400,000 × 0.21).
Your federal income tax is another direct tax. If you earn $100,000 in a year and owe $20,000 to the government, that’s a direct payment you make.
Other common direct taxes in the U.S. include property taxes that homeowners pay, collected by local governments based on the property’s assessed value. You’ll also encounter use taxes like vehicle licensing fees, estate taxes, gift taxes, and sin taxes on items like liquor and cigarettes.
What Is the Difference Between Direct Tax and Indirect Tax?
Direct taxes cannot be shifted to another party—they remain your responsibility to pay. Indirect taxes are different; whoever is liable can pass them on to someone else.
What Are Examples of Direct Taxes?
Direct taxes are those you pay directly to the levying party, like the IRS. Common ones include income, capital gains, or property taxes that you as a taxpayer send to the government.
What Are Some Examples of Indirect Taxes?
Indirect taxes include sales tax, excise tax, value-added tax (VAT), and goods and services tax (GST). Businesses often shift these costs to you by charging higher prices.
Can Direct Taxes Be Forwarded to Someone Else?
No, you can’t pass direct taxes on to a different person or entity. The individual or organization levied with the tax must pay it themselves.
The Bottom Line
With a direct tax, you pay it straight to the tax body, like the IRS. Capital gains taxes are one type of direct tax. A direct tax contrasts with an indirect tax, where the levy is on one entity, like a seller, but paid by another, such as you as a buyer in a store. Both types are key revenue sources for governments.
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