Direct taxation is a type of tax which is paid for by an individual directly to the government. It includes poll tax, land tax or income tax.
Direct taxation contrasts with an indirect tax, which is imposed on a transaction and paid to the government by the firm after the good has been bought. Indirect taxes include VAT and sales tax. With an indirect tax, the firm can choose how much of the tax to pass on to the consumer in the form of higher prices. When a consumer buys a good, he is not responsible for paying VAT. But, with a direct taxation, he is responsible for paying it all to the government.
Direct taxes in the UK
- Income Tax
- Corporation Tax
- Capital Gains Tax
- National Insurance Contributions
- Statutory Payments
- Inheritance Tax
- Petroleum Revenue Tax
- Student Loans
- Stamp Taxes
- Customs Duty
- Excise Duties
- Insurance Premium Tax
- Environmental taxes, including Air Passenger Duty
- Climate Change Levy
- Aggregates Levy
- Landfill Tax
Direct taxes and unavoidable taxes
In earlier times, direct taxes had a different emphasis. A direct tax was considered to be one that was unavoidable to pay. e.g. a simple poll tax was payable by everyone. There was no choice but to pay.
By contrast, an excise duty had an element of choice – if you don’t want to pay the excise duty, you don’t have to buy the alcohol. For political purposes, this distinction was important. The idea of direct taxes was equated with political tyranny. The Pennsylvania Minority, a group of delegates to the 1787 U.S. Constitutional Convention complained about the principle of direct taxation in the US constitution.
“The power of direct taxation applies to every individual … it cannot be evaded like the objects of imposts or excise, and will be paid, because all that a man hath will he give for his head. This tax is so congenial to the nature of despotism, that it has ever been a favorite under such governments. …”
In a way income tax is avoidable. You could choose not to earn a salary and live off the land (subsistence farming). In that way, you don’t have to be liable to pay income tax. However in a modern economy, for practical purposes, most people wouldn’t see it like this. Income tax is a non-transferable tax, payable by the person who gains the salary.
US vs UK distinction
In the US direct taxes are considered taxes on property or a poll tax ‘tax per head’ In the US, income taxes on wages are considered indirect taxes.
In the UK, income taxes are considered direct taxes
- Tax revenue sources
- Inelastic demand and taxes
- Ad valorem taxes – % of final price
- Indirect taxes
2 thoughts on “Direct taxation”
Thank you so much for this great content. Can you please cover effects of the direct and indirect tax. (OCR economics) Nobody in my class understands and it would be a great pleasure if you could do this.
Effect of income tax cuts (direct) https://www.economicshelp.org/blog/13566/economics/the-effect-of-tax-cuts/
Effect of specific tax – https://www.economicshelp.org/blog/794/economics/effect-of-tax-depending-on-elasticity/