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Direct and indirect taxation
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Taxes are sometimes referred to as direct tax or indirect tax. The
meaning of these terms can vary in different contexts, which can
sometimes lead to confusion. In economics, direct taxes refer to
those taxes that are collected from the people or organizations on
whom they are ostensibly imposed. For example, income taxes are
collected from the person who earns the income. By contrast,
indirect taxes are collected from someone other than the person
ostensibly responsible for paying the taxes. The person or other entity from whom a tax is collected (i.e., the nominal "taxpayer") is a matter of law. However, who "pays" the tax (in the sense of who bears the ultimate economic burden of the tax) is determined by the market place and is found by comparing the price of the good (including tax) after the tax is imposed to the price of the good before the tax was imposed. For example, suppose the price of gas in the U.S., without taxes, were $2.00 per gallon. Suppose the U.S. government imposes a tax of $0.50 per gallon on the gas. Forces of demand and supply will determine how that $0.50 tax burden is distributed among the buyers and sellers. For example, it is possible that the price of gas, after the tax, might be $2.40. In such a case, buyers would be paying $0.40 of the tax while the sellers would be paying $0.10 of the tax. |
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In law, the terms may have different meanings. In US constitutional
law, for instance, direct taxes refer to poll taxes and property
taxes, which are based on simple existence or ownership. Indirect
taxes are imposed on rights, privileges, and activities. Thus, a tax
on the sale of property would be considered an indirect tax, whereas
the tax on simply owning the property itself would be a direct tax. The distinction can be subtle, but it is important under US law. Until 1913 the United States Constitution required that all direct taxes be apportioned according to population. That is, if one state had twice the population of another state, then the direct tax revenue from that state had to be exactly twice that from the other state. In 1895, the US Supreme Court interpreted the income tax as a direct tax when applied to income from property, and struck down the tax as a result. (The ruling did not affect the status of income taxes on income from personal services, which continued to be classified as an excise, or indirect tax, not required to be apportioned. However, the Court ruled the entire income tax law invalid, including the tax on income from personal services, reasoning that Congress had not anticipated that only part of that particular law would be deemed enforceable.) The federal government then had no income tax until the Sixteenth Amendment was ratified in 1913. The Sixteenth Amendment removed the apportionment requirement for income taxes (whether considered direct or indirect). The apportionment requirement under the U.S. Constitution remains for other direct taxes, such as taxes on property by reason of ownership. Because there is no such national property tax under U.S. law, however, this legal restriction is not fiscally or politically significant. The term direct tax has more than one meaning: a colloquial meaning and, in the United States, a constitutional law meaning. Certain taxes may be direct taxes in the colloquial sense but indirect taxes in the constitutional sense. In the colloquial sense, a direct tax is one paid directly to the government by the persons (legal or natural) on whom it is imposed (often accompanied by a tax return filed by the taxpayer). Examples include some income taxes, some corporate taxes, and transfer taxes such as estate (inheritance) tax and gift tax. In this sense, a direct tax is contrasted with an indirect tax or "collected" tax (such as sales tax or value added tax (VAT)); a "collected" tax is one which is collected by intermediaries who turn over the proceeds to the government and file the related tax return. In the United States, the term "direct tax" has a different meaning for the purposes of constitutional law. Traditionally a direct tax in the constitutional sense means a tax on property "by reason of its ownership" as well as a capitation (a "head tax"). In the late 1800s, U.S. courts also began to treat an income tax on income from property as a direct tax. In this U.S. constitutional law sense, an "indirect tax," or "excise," is an "event" tax. In this sense, a transfer tax (such as gift tax and estate tax) is an indirect tax. Income taxes on income from personal services such as wages are also indirect taxes in this sense. In the United States, Article I, Section 9 of the constitution requires that direct taxes imposed by the national government be apportioned among the states on the basis of population; this provision made it difficult for Congress to impose a national income tax that applied to all forms of income until the 16th Amendment was ratified in 1913. After the Sixteenth Amendment, no Federal income taxes are required to be apportioned, regardless of whether they are direct taxes (taxes on income from property) or indirect taxes (all other income taxes). The term indirect tax has more than one meaning. In the colloquial sense, an indirect tax (such as sales tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). The intermediary later files a tax return and forwards the tax proceeds to government with the return. In this sense, the term indirect tax is contrasted with a direct tax which is collected directly by government from the persons (legal or natural) on which it is imposed. The term indirect tax has a different meaning for U.S. constitutional law purposes. |
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