View source for Direct tax

{{Short description|Tax paid directly to the government by the person on whom it is imposed}}
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{{Taxation}}
Though the actual definitions vary between jurisdictions, in general, a '''direct tax''' is a [[tax]] imposed upon a person or property as distinct from a tax imposed upon a transaction, which is described as an [[indirect tax]]. There is a distinction between direct and indirect tax depending on whether the tax payer is the actual taxpayer or if the amount of tax is supported by a third party, usually a client. The term may be used in economic and political analyses, but does not itself have any legal implications. However, in  [[the United States]], the term has special constitutional significance because of a provision in the U.S. Constitution that any ''direct taxes'' imposed by the national government be apportioned among the states on the basis of population. In the [[European Union]] direct taxation remains the sole responsibility of member states.

==General meaning==
In general, a direct tax is one imposed upon an individual person ([[juristic person|juristic]] or [[natural person|natural]]) or property (i.e. real and personal property, livestock, crops, wages, etc.) as distinct from a tax imposed upon a transaction. In this sense, indirect taxes such as a [[sales tax]] or a [[value added tax]] (VAT) are imposed only if and when a taxable transaction occurs. People have the freedom to engage in or refrain from such transactions; whereas a direct tax (in the general sense) is imposed upon a person, typically in an unconditional manner, such as a poll-tax or head-tax, which is imposed on the basis of the person's very life or existence, or a property tax which is imposed upon the owner by virtue of ownership, rather than commercial use. Some commentators have argued that "a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be."<ref name=":0">''Britannica Online'', Article on [http://www.britannica.com/eb/article-72003/taxation Taxation]. See also ''Financial Dictionary Online'', Article on [http://financial-dictionary.thefreedictionary.com/Direct+taxes Direct taxes].</ref>

Direct tax is supposed to be borne and paid by the same person. The person who pays the amount of direct tax does not recover all or part of the tax elsewhere. It is in this sense that direct taxation is opposed to indirect taxation. It is the notion of fiscal incidence which allows to analyse who ultimately, weights the burden of a tax, that determines whether the tax is direct or indirect. Direct taxation is generally declarative (established either by the person concerned or by a third party).

The unconditional, inexorable aspect of the direct tax was a paramount concern of people in the 18th century seeking to escape tyrannical forms of government and to safeguard individual liberty.

The distinction between direct and indirect taxation was first extensively discussed by [[Adam Smith]] in his ''[[Wealth of Nations]]'', as in the following passage:

{{cquote|It is thus that a tax upon the necessaries of life operates exactly in the same manner as a direct tax upon the wages of labour. ... if he is a manufacturer, will charge upon the price of his goods this rise of wages, together with a profit; so that the final payment of the tax, together with this overcharge, will fall upon the consumer.<ref>[http://www.econlib.org/library/Smith/smWN21.html ''Wealth of Nations, Book V Chapter 2]</ref>}}

The [[Pennsylvania Minority]], a group of delegates to the 1787 [[U.S. Constitutional Convention]] who dissented from the document sent to the states for ratification, objected over this kind of taxation, and explained:

{{cquote|The power of direct taxation applies to every individual ... it cannot be evaded like the objects of imposts or excise, and will be paid, because all that a man hath will he give for his head. This tax is so congenial to the nature of despotism, that it has ever been a favorite under such governments. ...

The power of direct taxation will further apply to every individual ... however oppressive, the people will have but this alternative, either to pay the tax, or let their property be taken for all resistance will be vain.<ref>[http://memory.loc.gov/cgi-bin/query/r?ammem/bdsdcc:@field(DOCID+@lit(bdsdccc0401)) ''The Address and Reasons of Dissent of the Minority of the Convention, of the State of Pennsylvania, to their constituents.'']</ref>}}

== Examples of direct taxes ==
Direct taxation can apply on income or on wealth (property tax; estate tax or wealth tax). Here below a few examples of direct taxes existing in the United States:<ref name=":1">{{Cite web|title=Direct Taxes: Taxes that are paid straight or directly to the government|url=https://corporatefinanceinstitute.com/resources/knowledge/other/direct-taxes/|url-status=live|access-date=|website=corporatefinanceinstitute}}</ref>

* [[Income tax]]: it is the most important direct tax in many developed countries. It is based on incomes of taxpayers. A certain amount of money is taken from the wage of the individuals. It is often a progressive taxation because the tax rate increases when the incomes are increasing. When this type of tax is applied to corporations and firms, it is called corporate income tax.
* Transfer taxes: the most frequent form of transfer taxes is the estate tax. Such a tax is levied on the taxable portion of the property of a deceased individual. A gift tax is also another form of transfer taxes when a certain amount is collected from people who are transferring properties to another individual.

* Entitlement tax or [[Payroll tax|payroll taxes]]: this type of direct tax serves to finance social security and health services. The entitlement tax is collected through payroll deductions. Their importance increases with the rise of the development of the Welfare State during the twentieth century. 
* [[Property tax]]: property tax is charged on properties such as land and buildings. 
* [[Capital gains tax]]: this tax is collected when an individual earns gains from the sale of capital, for example when an individual sells stocks, real estate, or a business. The tax is computed by determining the difference between the acquisition amount and the selling amount.

== Effects of direct taxation and comparison of indirect taxation ==
Direct taxation has a few advantages and also some inconveniences in comparison of indirect taxes. It promotes equality and equity because direct taxes are based on ability to pay of taxpayers and in the case of a progressive tax structure, every person is taxed differently depending on his income. Another advantage of direct taxation is that the government and the taxpayer know the amount they will receive and they pay, even before the collection of the tax. Direct taxation and in particular income tax act as automatic stabilizers. Some direct taxes are easy to collect for the government and the fiscal administration because they are collected at the source. Yet, tax collection can be expensive depending on the efficiency of the fiscal administration. Running the tax collection office have some administrative costs (keeping the records of incomes of the population for example), in particular when different tax rates are applied. Moreover, direct taxes can be evaded (tax evasion affects mainly direct taxes) whereas indirect taxes cannot be evaded (when the taxed transaction occurs, it is not possible to avoid the burden of the tax).<ref name=":1" />

Direct taxes decrease the savings and earnings of individuals and firms but indirect taxation make goods and services more expensive (the burden of the tax is reflected in the prices). Contrary to indirect taxation which leads to inflation (increasing of the prices), direct taxes can help to reduce inflation.

There is no consensus among the academic literature to designate if direct taxation is more efficient or not. Earlier works based on static models favour direct taxation whereas the recent literature, based on neoclassical growth models, shows that indirect taxation is more efficient. The conclusions of these debates are that the answers are mostly conjectural, depending on the economic structure.<ref>{{Cite book|last=Tresch|first=Richard|title=Public Finance: A Normative Theory|publisher=Elsevier|year=2015|pages=220–221|edition=third}}</ref>

== Direct taxes and progressivity ==
Contrary to indirect taxes such as value-added taxes, direct taxes can be adjusted to the ability to pay of the taxpayer according to his status (income, age…). So, direct taxes can be [[Progressive tax|progressive]] (the tax rate increases as the taxable amount increases), [[Proportional tax|proportional]] (the tax rate is fixed, it does not change when the taxable base amount increases or decreases) or [[Regressive tax|regressive]] (the tax rate decreases as the taxable amount increases) according to their structure.<ref name=":0" /> It differs from indirect taxes which are generally regressive because everyone pays the same amount whatever his ability to pay (meaning the burden of the tax is more important for the poorest than for the richest). 

Moreover, direct taxation are transfers which can have a redistributive preoccupation (combined with the will of increasing tax revenue).<ref name=":2">{{Cite journal|last=Canceill|first=Geneviève|date=1985|title=L'effet redistributif de l'impôt direct et des prestations familiales|url=https://www.persee.fr/doc/estat_0336-1454_1985_num_177_1_4976|journal=Économie et Statistique|volume=177|pages=23–39|doi=10.3406/estat.1985.4976}}</ref> Indeed, taxation is a main tool of the redistributive function of the government identified by [[Richard Musgrave (economist)|Richard Musgrave]] in his ''The Theory of Public Finance'' (1959). A progressive direct taxation could participate in the reduction of inequalities and correcting difference in living standards among the population.<ref name=":2" />

Another effect of a progressive direct taxation is that such tax structure act as automatic stabilizers when prices are stable. Indeed, when incomes (in the example of a progressive income tax) decrease, as a result of recession, the average tax rate is reduced – individuals have to face lower tax rates because their earnings and their incomes have been reduced. And similarly, when incomes are increasing, the average tax rate increases also.<ref name=":3">{{Cite book|last=Stiglitz|first=Joseph|title=Economics of the public sector|publisher=Norton & Company|year=2000|location=New York|pages=455–466|edition=third}}</ref> This mechanism of progressive taxation participates to the stabilization of the economy, another function of the government in the works of Musgrave (stabilization branch of the government which prevents major fluctuations in real GDP). When incomes fall, tax revenues fall too (and in the case of progressive taxation, even tax rates drop also) reducing tax burden on taxpayers.

==U.S. constitutional law==
In the United States, the term "direct tax" has acquired specific meaning under constitutional law: a direct tax is a tax on property "by reason of its ownership"<ref>See, e.g., the United States Supreme Court case of ''Fernandez v. Wiener'', in which the Court stated that a direct tax is a tax "which falls upon the owner merely because he is owner, regardless of his use or disposition of the property." ''Fernandez v. Wiener'', 326 U.S. 340, 66 S. Ct. 178, 45-2 U.S. Tax Cas. (CCH) ¶10,239 (1945).</ref> (such as an ordinary real estate [[property tax]] imposed on the person owning the property as of January 1 of each year) as well as a capitation (a "tax per head").<ref>A capitation is defined as a "poll tax". ''Black's Law Dictionary'', p. 191 (5th ed. 1979).</ref><ref>A poll tax is defined as a "capitation tax; a tax of a specific sum levied upon each person within the jurisdiction of the taxing power and within a certain class (as, all males of a certain age, etc.) without reference to his property or lack of it." Black's Law Dictionary, p. 104</ref> Income taxes on income from personal services such as wages are indirect taxes in this sense.<ref>See generally ''Pollock''.</ref> The [[United States Court of Appeals for the District of Columbia Circuit]] has stated: "Only three taxes are definitely known to be direct: (1) a capitation [ . . . ], (2) a tax upon real property, and (3) a tax upon personal property."<ref>Opinion on rehearing, July 3, 2007, p. 20, ''Murphy v. Internal Revenue Service and United States'', case no. 05-5139, United States Court of Appeals for the District of Columbia Circuit, 2007-2 U.S. Tax Cas. (CCH) paragr. 50,531 (D.C. Cir. 2007) ([[Obiter dictum|dicta]]).</ref> In ''[[National Federation of Independent Business v. Sebelius]]'', the Supreme Court held that a penalty directly imposed upon individuals for failure to possess health insurance, though a tax for constitutional purposes, is not a direct tax.<ref>''NFIB v. Sebelius'', 567 U.S. ___ (2012).</ref> The Court reasoned that the tax is not a capitation because not everyone will be required to pay it, nor is it a tax on property. Rather "it is triggered by specific circumstances."<ref>''NFIB'', 567 U.S. ___, 41 (2012).</ref>

In the [[United States]], [[Article One of the United States Constitution#Clause 3: Apportionment of Representatives and taxes|Article I, Section 2, Clause 3]]<ref>{{Cite web|title=The Constitution of the United States|url=https://www.launchknowledge.com/constitution/|access-date=2021-05-12|website=Launch Knowledge|language=en-US}}</ref> of the Constitution requires that direct taxes imposed by the national government be apportioned among the states on the basis of population. After the 1895 [[Pollock v. Farmers' Loan & Trust Co.|''Pollock'']] ruling (essentially, that taxes on income from property should be treated as direct taxes), this provision made it difficult for [[Congress of the United States|Congress]] to impose a national [[income tax]] that applied to all forms of income until the [[Sixteenth Amendment to the United States Constitution|16th Amendment]] was ratified in 1913. After the Sixteenth Amendment, Federal income taxes are subject to the rule of uniformity but not the rule of apportionment.<ref>''Brushaber v. Union Pacific Railroad Co.'', 240 U.S. 18 (1916).</ref> Before this amendment, the principal sources of revenues of the federal government of the United States were excise taxes and customs duties. Their importance decreased during the twentieth century and the main federal government’s resources have become individual income taxes and payroll taxes.<ref name=":3" /> Other evolutions were observed at the local and state level with a decrease of importance of property taxes whereas income and sale taxes became more important.<ref name=":3" />

In the context of income taxes on wages, salaries and other forms of compensation for personal services, see, e.g., ''United States v. Connor'', 898 F.2d 942, 90-1 U.S. Tax Cas. (CCH) paragr. 50,166 (3d Cir. 1990) (tax evasion conviction under {{usc|26|7201}} affirmed by the [[United States Court of Appeals for the Third Circuit]]; taxpayer's argument – that because of the Sixteenth Amendment, wages were not taxable – was rejected by the Court; taxpayer's argument that an income tax on wages is required to be apportioned by population also rejected); ''Perkins v. Commissioner'', 746 F.2d 1187, 84-2 U.S. Tax Cas. (CCH) paragr. 9898 (6th Cir. 1984) ({{usc|26|61}} ruled by the [[United States Court of Appeals for the Sixth Circuit]] to be "in full accordance with Congressional authority under the Sixteenth Amendment to the Constitution to impose taxes on income without apportionment among the states"; taxpayer's argument that wages paid for labor are non-taxable was rejected by the Court, and ruled frivolous).

==Direct taxation in India==
[[Goods and Services Tax (India)|Direct tax]] is a form of collecting taxes applicable on the general public by the means of their personal income and wealth generated and collected through formal channels and worthy government credentials such as Permanent account number and bank account details.

Section 2(c) of the Central Boards of Revenue Act, 1963 of India defines "direct tax" as follows: <br>
:″(1) any duty leviable (or) tax chargeable under-
 
::(i) the Estate Duty Act, 1954 (34 of 1953.);
 
::(ii) the Wealth-tax Act, 1957 (27 of 1957.);
 
::(iii) the Expenditure-tax Act, 1957 (29 of 1957.);
 
::(iv) the Gift-tax Act, 1958 (18 of 1958.);
 
::(v) the Income-tax Act, 1961 (43 of 1961.)

:(vi) the Super Profits Tax Act, 1963 (14 of 1963.); and

:(2) any other duty or tax which, having regard to its nature or incidence, may be declared by the Central Government, by notification in the Official Gazette, to be a direct tax.″ <ref>{{cite web| url=http://theindianlawyer.in/statutesnbareacts/acts/c22.html |access-date= January 1, 2019 |title=The Central Boards of Revenue Act, 1963 }}</ref><ref>{{cite web| url=https://www.incometaxindia.gov.in/_layouts/15/dit/Pages/viewer.aspx?grp=Act&cname=CMSID&cval=7DFC16FE-B202-4ce1-AD0C-4715F1BA770E&searchFilter=[{%22CrawledPropertyKey%22:1,%22Value%22:%22Act%22,%22SearchOperand%22:2},{%22CrawledPropertyKey%22:0,%22Value%22:%22Central%20Boards%20of%20Revenue%20Act,%201963%22,%22SearchOperand%22:2}]&k=&IsDlg=0|access-date= January 1, 2019 |title=Section 2, Central Boards of Revenue Act, 1963 }}</ref>

==Direct taxation in other countries==
[[File:GDP per capita PPP vs direct taxes 2016.svg|thumb|[[Public finance|General government]] revenue, in % of [[GDP]], from direct taxes. For this data, the [[variance]] of GDP per capita with purchasing power parity (PPP) is explained in 43% by tax revenue.]]

Tax policy in the [[European Union]] (EU) consists of two components: direct taxation, which remains the sole responsibility of member states, and [[indirect taxation]], which affects free movement of goods and the freedom to provide services. With regard to [[European Union direct taxes]], Member States have taken measures to prevent tax avoidance and double taxation. EU direct taxation covers, regarding companies, the following policies: the common consolidated corporate tax base, the common system of taxation applicable in the case of parent companies and subsidiaries of different member states (to avoid [[withholding tax]] when the dividend qualifies for application of the EC Parent-Subsidiary Directive,<ref>[https://books.google.com/books?id=t0Z_Jla7D1gC&dq=salvador+trinxet&source=bl&ots=4y2M7NB-c4&sig=xosb_2rlC-Q3B5DuIYCkdsgXezc&hl=es&sa=X&ei=wQFNUPDjI4HQ9ASr_ICoBA&ved=0CD0Q6AEwBTgK Parent Subsidiary Directive, by Salvador Trinxet Llorca] ''See.'' Charles Edward Andrew Lincoln IV, ''Is Incorporation Really Better Than Central Management and Control for Testing Corporate Residency? An Answer to Corporate Tax Evasion and Inversion'', 43 Ohio N.U.L. Rev. 359 (2017). </ref> the financial transaction tax, interest and royalty payments made between associated companies and elimination of double taxation if the payment qualifies for application of the EC Interest and Royalties Directive.<ref>[https://books.google.com/books?id=abgHFE7omKwC&pg=PA52&lpg=PA52&dq=trinxet+interest+royalty&source=bl&ots=4elhxsLoum&sig=Kg7r1sPymxDSgfvu7pGJQrduacQ&hl=es&sa=X&ei=oGFNUO2hJJPu8ATCqYDYDQ&sqi=2&redir_esc=y#v=onepage&q=trinxet%20interest%20royalty&f=false European Union Direct Taxes, by Salvador Trinxet Llorca]</ref> Regarding direct taxation for individuals, the policies cover taxation of savings income, dividend taxation of individuals and tackling tax obstacles to the cross-border provision of occupational pensions.

==See also==
*[[Indirect tax]]
*[[United Kingdom Corporation Tax]]
*[[Income tax in the United States]]

==References==
{{Reflist|2}}

==Sources==
* {{cite book |last=Foster |first=Robert |year=1895 |title=Commentaries on the Constitution of the United States: Historical and Judicial |volume=1 |place=Boston |publisher=The Boston Book Co. |pages=415–423 |url=https://books.google.com/books?id=Rd49AAAAIAAJ }}
*Joseph E. Stiglitz, Economics of the public sector (third edition), 2000, New York, Norton & Company. pp. 455-466

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[[Category:Taxes by type]]
[[Category:Tax terms]]