What Is a Direct Tax?

With a direct tax, you pay the tax to the entity that imposed it. Examples include 澳洲幸运5官方开奖结果体彩网:income tax, real property tax, personal property tax, and taxes on assets, all of which are paid by an individual taxpayer directly to the government.

The History of Direct Taxes

The modern distinction between direct taxes and indirect taxes came about with the ratification of the 澳洲幸运5官方开奖结果体彩网:16th Amendment to the U.S. Constitution in 1913. Before the 16th Amendment, tax law in the United States was written so that direct taxes had to be directly apportioned to a state’s population. A state with a population that waꦬs 75% of the size of another🍎 state’s, for example, would only be required to pay direct taxes equal to 75% of the larger state’s tax bill.

This antiquated verbiage created a situation in which the federal government could not impose many direct taxes, such as a personal income tax, due to apportionment requirements. However, the advent of the 16th Amendment changed the tax code and allowed for the levying of numerous direct and indirect taxes.

Examples of Direct Taxes

Corporate taxes are an example of direct taxes. If, for example, a manufacturing company reports $1 million in revenue, $500,000 in the 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS), and $100,000 in 澳洲幸运5官方开奖结果体彩网:operating costs, its earnings before interest, taxes, depreciatio🍨n, and amortization (EBITDA) would be $400,000. If the company has n⛦o debt, depreciation, or amortization, and has a corporate tax rate of 21%, its direct tax would be $84,000 ($400,000 × 0.21 = $84,000).

An indi𓆏vidual’s federal income tax is another example of a direct tax. If a person makes $100,000 in a year, for example, and owes the government $20,000 in taxes, that $20,000 would be a direct tax.

There are a number of other direct taxes that are common in the U.S., such as the 澳洲幸运5官方开奖结果体彩网:property taxes that hom🐓eowners are required to pay. Those are typically collected by local governments and based on the ass𒊎essed value of the property.

Other types of direct taxes in the U.S. and elsewhere include 澳洲幸运5官方开奖结果体彩网:use taxes (such as vehicle licensing and registration fees), 澳洲幸运5官方开奖结果体彩网:estate taxes, 澳洲幸运5官方开奖结果体彩网:gift taxes, and so-called 澳洲幸运5官方开奖结果体彩网:sin taxes on liquor and cigarettes, for example.

The Bottom Line

With a direct tax,𝔍 you pay taxes straight to the tax body, like the IRS. Capital g🌜ains taxes are a type of direct tax.

A direct tax is the opposite of an 澳洲幸运5官方开奖结果体彩网:indirect tax, where the tax is levied on one entity, such as a seller, and paid by another—such as a 澳洲幸运5官方开奖结果体彩网:sales tax paid by the buyer in a retail setting.

Both kinds of taxes are important revenue sources for governments.