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{{Short description|Tax paid directly to the government by the person on whom it is imposed}}
{{Taxation}}
==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
Direct taxes are thought 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]],''
{{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">
[[Justice (title)|Justice]] [[William Paterson (judge)|William Paterson]] quotes Smith approvingly,<ref name="Hylton">{{cite court|litigants=Hylton v. United States|vol=3|reporter=Dall.|opinion=171|date=1796|url=https://tile.loc.gov/storage-services/service/ll/usrep/usrep003/usrep003171/usrep003171.pdf}}</ref>{{rp|180-181 ([[seriatim]] op.)}} noting that indirect taxes are “circuitous modes of reaching the revenue of individuals,”<ref name="Hylton"/>{{rp|180}} which implies that direct taxes are those which are not circuitous.{{efn|text=Whatever this precisely means, however, is unclear. Nonetheless, “the distinction was widely understood among the [[Founding Fathers of the United States|founding generation]]” of the United States. {{cite journal|last=Natelson|first=Robert|date=2015|title=What the Constitution Means by "Duties, Imposts, and Excises"—and "Taxes" (Direct or Otherwise)|url=https://scholarlycommons.law.case.edu/cgi/viewcontent.cgi?article=2649&context=caselrev|journal=Case Western Reserve University Law Review|volume=66|issue=2|page=297}}{{rp|345}}}}
▲{{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:
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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 (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>
* [[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. 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 the taxpayer and in the case of a progressive tax structure, every person is taxed differently depending on their 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 has 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. Indirect taxation however 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 their 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="Britannica"/> It differs from indirect taxes which are generally regressive because everyone pays the same amount regardless of ability to pay (meaning the burden of the tax is greater for the poorer than for the richer).
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
In the [[United States]],
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
==Direct taxation in India==
[[
Section 2(c) of the Central Boards of Revenue Act, 1963 of India defines "direct tax" as follows: <br>
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::(iv) the Gift-tax Act, 1958 (18 of 1958.);
::(v) the Income-tax Act, 1961 (43 of 1961.)
:(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>
==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&
==See also==
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*[[United Kingdom Corporation Tax]]
*[[Income tax in the United States]]
==Notes==
{{notelist}}
==References==
{{
==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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