Direct tax: Difference between revisions

Although the actual definitions vary between jurisdictions, in general, a '''direct tax or income 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 taxtaxes 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,except in the [[the United States of America]], where the term has special constitutional significance because of atwo provisionprovisions in the U.S. Constitution that any ''direct taxes'' imposed by the national government be apportioned among the states on the basis of population;<ref name="Constitution 1">{{cite constitution|article=I|section=2|clause=3|polity=United States|date=1791|url=https://www.archives.gov/founding-docs/constitution-transcript#1-2|website=National InArchives}}</ref><ref name="Constitution 2">{{cite constitution|article=I|section=9|clause=4|polity=United States|date=1791|url=https://www.archives.gov/founding-docs/constitution-transcript#1-9|website=National Archives}}</ref> and in the [[European Union]], where direct taxation remains the sole responsibility of member states.{{cn|date=August 2024}}

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 "athe directdistinction taxrests ison onewhether thatthe cannotburden beof shiftedtaxation bycan thebe taxpayershifted tofrom someoneone else,[[legal whereasperson]] anto indirect tax can beanother."<ref name=":0Britannica">''Britannica Online'', Article on [http://www.britannica.com/eb/article-72003/taxation Taxation]. See also ''</ref><ref>Financial Dictionary Online'', ArticleDirect onTax [http://financial-dictionary.thefreedictionary.com/Direct+taxes Direct taxes].</ref>

Direct taxtaxes isare supposedthought 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 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 name="Smith">[http{{cite book|last=Smith|first=Adam|title=Wealth of Nations|edition=4|year=1786|orig-year=1776|volume=3|url=https://wwwbooks.econlibgoogle.orgcom/library/Smith/smWN21.html ''Wealth of Nations, Book V Chapter 2]books?id=l3MwqyVcrcAC}}</ref>{{rp|333}}}}

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 (though not all of these meet the US constitutional definition of a direct tax, as stated below):<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|archive-url=https://web.archive.org/web/20200925063922/https://corporatefinanceinstitute.com/resources/knowledge/other/direct-taxes/ |archive-date=2020-09-25 }}</ref>

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 taxpayersthe taxpayer and in the case of a progressive tax structure, every person is taxed differently depending on histheir 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 havehas 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" />

Contrary to indirect taxes such as value-added taxes, direct taxes can be adjusted to the ability to pay of the taxpayer according to histheir 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=":0Britannica" /> It differs from indirect taxes which are generally regressive because everyone pays the same amount whateverregardless hisof ability to pay (meaning the burden of the tax is more importantgreater for the poorestpoorer than for the richestricher).

In the United States, the term "direct“direct tax"tax” has acquired specific meaning under constitutional law: a direct tax isincludes a taxtaxes on property<ref name="by reason of its ownershipPollock"<ref>See,{{cite e.g., the United States Supreme Court case of ''Fernandezcourt|litigants=Pollock v. WienerFarmers'', inLoan which& theTrust CourtCo.|vol=158|reporter=U.S.|opinion=601|year=1895|url=https://tile.loc.gov/storage-services/service/ll/usrep/usrep158/usrep158601/usrep158601.pdf}}</ref>{{rp|618}} statedby that a direct tax is a tax "which falls upon the owner merely because he is owner, regardlessreason of hisownership<ref>{{cite use or disposition of the property." ''court|litigants=Fernandez v. Wiener'', |vol=326 |reporter=U.S. |opinion=340, 66 S|pinpoint=362|year=1945|url=https://tile. Ctloc.gov/storage-services/service/ll/usrep/usrep326/usrep326340/usrep326340.pdf}}</ref><ref>{{cite 178,court|litigants=Bromley 45-2v. McCaughn|vol=280|reporter=U.S. Tax Cas|opinion=124|pinpoint=137|year=1929|url=https://tile. (CCH) ¶10,239 (1945)loc.gov/storage-services/service/ll/usrep/usrep280/usrep280124/usrep280124.pdf}}</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[[Poll capitation (atax|capitations]].<ref name="taxHylton"/>{{rp|175 per([[Samuel head")Chase|Chase]], J.)}}<ref name="Hylton"/>A{{rp|183 capitation([[James isIredell|Iredell]], definedJ.)}} Income taxes on income from personal services such as awages "pollare tax".indirect ''Black'staxes Lawin Dictionary'',this psense.<ref>{{cite 191court|litigants=Springer (5th edv. 1979)United States|vol=102|reporter=U.S.|opinion=586|pinpoint=598|date=1871|url=https://tile.loc.gov/storage-services/service/ll/usrep/usrep102/usrep102586/usrep102586.pdf}}</ref><ref name="Brushaber">A{{cite pollcourt|litigants=Brushaber taxv. isUnion definedPacific asRailroad|vol=240|reporter=U.S.|opinion=1|date=1916|url=https://tile.loc.gov/storage-services/service/ll/usrep/usrep240/usrep240001/usrep240001.pdf}}</ref>{{rp|15}}<ref>{{cite acourt|litigants=[[Moore "capitationv. tax;United aStates tax(2024)|Moore ofv. aUnited specificStates]]|vol=602|reporter=U.S.|opinion=___|pinpoint=*7|year=2024|url=https://www.supremecourt.gov/opinions/23pdf/22-800_jg6o.pdf}}</ref>{{efn|text=Nonetheless, sum[[Adam leviedSmith]] uponappears eachto personhave withinconsidered thetaxes jurisdictionon of“revenue” theto taxinghave powerbeen anddirect, withinexplaining athe certainadvent classof indirect taxation (as, alla malesresult of a“the certainstate age,not etc.)knowing without referencehow to histax, propertydirectly orand lackproportionably, ofthe it."revenue Black'sof Lawits Dictionary, psubjects.”<ref 104<name="Smith"/ref>{{rp|331}} Income taxesMoreover, on[[Justice income(title)|Justice]] from[[William personalPaterson services(judge)|William suchPaterson]] as wages are indirect taxes inquotes this sensepassage approvingly.<ref>See generally ''Pollock''.<name="Hylton"/ref>{{rp|180}}}} The [[United States Court of Appeals for the District of Columbia Circuit]] has stated: "Only“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 athe penalty[[Affordable directlyCare Act|ObamaCare]] penalty imposed upon individuals for failure to possess health insurance, though a tax for constitutional purposes,<ref isname="NFIB">{{cite notcourt|litigants=[[National aFederation directof taxIndependent Business v.<ref>'' Sebelius|NFIB v. Sebelius'', ]]|vol=567 |reporter=U.S. ___ (|opinion=519|date=2012)|url=https://tile.loc.gov/storage-services/service/ll/usrep/usrep567/usrep567519/usrep567519.pdf}}</ref>{{rp|570}} Theis Courtnot a direct tax, reasonedreasoning that the tax is notneither a capitationtax becauseon notproperty, everyonenor willa becapitation requiredin tothat pay“it it,is nortriggered isby itspecific acircumstances” taxrather onthan property.levied Rather“‘without "itregard isto triggeredproperty, byprofession, specificor circumstances."<ref>''NFIB'',any 567other U.Scircumstance.''’”<ref ___, 41 (2012).name="NFIB"></ref>{{rp|571}}

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|date=10 September 2020 |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.<ref name="Constitution 1"/><ref name="Constitution 2"/> After the 1895 [[Pollock v. Farmers' Loan & Trust Co.|''Pollock'']] ruling (essentially, that taxes on income from property should be treated as direct taxes),<ref name="Pollock"/>{{rp|634}} 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|16thSixteenth Amendment]] was ratified in 1913. AfterSince the Sixteenth Amendmentthen, Federal income taxes arehave been subject to the rule of uniformity but not the rule of apportionment.<ref name="Brushaber">''Brushaber v. Union Pacific Railroad Co.'', 240 U.S. 18 (1916).</ref>{{rp|page=18}} Before this amendmentthen, the principal sources of revenuesrevenue offor the federal government of the United States were excise taxes and customs duties. Their importance thus decreased during the twentieth century and the main federal government’sgovernment'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 – thatargument—that because of the Sixteenth Amendment, wages were not taxable – wastaxable—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“in full accordance with Congressional authority under the Sixteenth Amendment to the Constitution to impose taxes on income without apportionment among the states"states”; taxpayer's argument that wages paid for labor are non-taxable was rejected by the Court, and ruled frivolous).

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&q=salvador+trinxet 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&dq=trinxet+interest+royalty&pg=PA52 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.