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Tax
Direct and Indirect
Taxation
Taxes
are at times referred to as either direct tax or indirect tax. The
meaning,
however, of these terms can sometimes
vary in different contexts, which can then lead to confusion. In
economics, direct taxes refer to those taxes that are collected from the
organizations or people, on whom they are ostensibly imposed. For
instance, income taxes are collected from the persons who earn their
income. In contrast, indirect taxes are collected from someone other than
the person who would be normally held responsible for paying the
taxes.
This person or other entity from whom a tax
is collected or the nominated taxpayer is decided by the law. However, the
actual decision as to who in reality 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 goods, including tax,
after the tax is imposed to the price of the goods before the tax was
imposed. For example, if we assume that the price of gas in the United
States of America without taxes were $3.00 per gallon and that the
government decides to impose a tax of $0.30 per gallon on the gas, it
would be the forces of the demand and supply chain that will determine how
that $0.30 tax burden is distributed amongst the buyers and sellers. For
instance, it is possible that the price of gas, after the tax, might
become $3.20. In such an event, buyers would end up paying $0.20 of the
tax while the sellers would be paying only $0.10 of the tax.
In law however, the terms may have
different meanings. In the U.S. constitutional law, for example, direct
taxes refer to property and poll taxes, which are based on simple
existence or ownership. Indirect taxes on the contrary, are imposed on
rights, privileges, and activities. Therefore, a tax on the sale of
property would be considered an indirect tax, whereas the tax on simply
owning the property itself would be regarded a direct tax.
The distinction can be subtle, but it is of
great importance under U.S. law. Until the year 1913, the United States
Constitution dictated that all direct taxes be suitably apportioned
according to the population. This meant that, if one state had twice the
population as that of another, then the direct tax revenue from that state
had to be exactly twice that from the other state. In the year 1895, the
U.S. Supreme Court interpreted the income tax as a form of direct tax when
applied to income from property, and struck down the tax as a result. This
ruling however, did not affect the status of income taxes on income from
personal services, which continued to retain its status as an excise, or
indirect tax, and did not require to be apportioned. Instead, the court
ruled the entire income tax law invalid, including the tax on income from
personal services, reasoning that the Congress had not anticipated that
only part of that particular law would be deemed enforceable.
The federal government then did not have
any income taxes until the Sixteenth Amendment was sealed in the year
1913. This amendment removed the apportionment requirement for income
taxes irrespective of whether it was considered direct or indirect.
The
apportionment requirement under the U.S. Constitution remains to this day
for other direct taxes, such as taxes on property by reason of ownership.
Since there is no such national property tax under the U.S. law however,
this legal restriction is not politically or fiscally
significant.
An income tax is therefore, a tax
levied on the financial income of persons, corporations or other legal
entities. There are various systems of taxation of income that exist,
which range from a flat tax to a progressive tax system. The tax levied on
the income of corporations or companies is often referred to as corporate
tax, corporate income tax or corporation tax. Individual income taxes are
generally a tax on the total income of the individual accommodating a few
deductions, while corporate income taxes often tax the net income which is
the difference between gross receipts and expenses.
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