What Is A Direct Tax?
A direct tax is one where the same entity shares the incidence and impact of taxation.
Here, the responsibility cannot be shared by anyone other than the taxpayer. They are paid directly to the government and are allotted based on their financial muscle and earning power. They are allocated as a percentage of an individual’s total income, so higher earnings translate to increased taxes and vice versa.
It is directly imposed on properties or income of the taxpayer as against goods and services as in sales tax. It is a proponent of equity through the direct proportionality of income or property value to taxes. The proceeds from the taxes are used to fund social services and aid the equitable distribution of income in society.
Direct taxes are remitted without the need for an intermediary before they are distributed to meet societal needs. They are firmly enforced on every individual who is not rightfully exempted from payments.
Direct taxes’ positives are that it encourages equality, certainty, efficiency, and a certain level of elasticity to accommodate fluctuations as earnings change. On the other hand, indirect taxes hand the payment to individuals other than the earner and bring a more incredible deal of automation to boot as they can hardly be evaded in that all who buy/ sell; render/receive services feel its impact. However, they are directly involved in inflation.
Some kinds of direct taxes are:
Income Tax: Here, a certain percentage of an individual’s income is levied, depending on their earnings
Transfer Tax: It entails the amount of tax demanded of the taxable portion of a deceased’s property. It is similar to a ‘gift tax’ where an amount is charged from people transferring properties to other individuals.
Entitlement Tax: This kind is obtained through payroll deductions and is grouped as the Federal Insurance Contributions Act used to fund programs like Medicare and social security
Tax: It is as charged on properties, like land and buildings, with proceeds used to maintain public institutions and services, e.g., health care, security, emergency responses, educational systems, and public infrastructure.
Direct Tax Example
Homes attract a direct tax as a small percentage of their values remitted to the local government.« Back to Glossary Index