Direct Tax

A direct tax is levied on individuals and organizations and is not expected to be passed on to another payer (unlike indirect taxes such as sales and excise taxes), though economic incidence can still fall upon others. Often with a direct tax, such as the individual income tax, tax rates increase as the taxpayer’s ability to pay, or financial resources, increases, resulting in what is called a progressive tax. Article 1, Section 9, of the US Constitution requires direct taxes to be apportioned by state population, though the 16^th Amendment establishes that income taxes are not subject to this requirement.

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Examples of Direct Taxes

Direct taxes include:

• Individual Income Tax
• Corporate Income Tax
• Capital Gains Tax
• Property Taxes

Sound Tax Policy

Tax Foundation’s principles of sound tax policy are simplicity, transparency, neutrality, and stability. These principles should serve as touchstones for policymakers and taxpayers everywhere.

Direct taxation is often less simple than indirect taxation, with the effective rate of direct taxes varying from person to person, whereas sales, excise, and other indirect taxes are typically imposed as a set amount per unit or as a fixed percentage of the sales price.  There is variation, moreover, across taxes. For example, taxes on wages tend to be straightforward in what must be paid and when it is due, whereas capital gains taxes can be a more complex tax burden.

The constitutional limits on direct taxes, and resulting controversies, ultimately led to the ratification of the 16^th Amendment, which allowed for a federal (unapportioned) individual income tax without regard to the general rule on direct taxes. Courts have affirmed that property and capitation taxes are direct taxes, creating a potential impediment to the enactment and implementation of wealth taxes.

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