Direct Tax

Published Dec 26, 2022

Definition of Direct Tax

A direct tax is a tax that is paid directly by an individual or business to the government. That means it is not collected through intermediaries, such as employers or retailers. Examples of direct taxes include income taxes, property taxes, and inheritance taxes.

Example

To illustrate this, meet John, who’s living in the United States. John has an annual income of USD 100,000 and is subject to federal income tax. That means he has to pay a certain percentage of his income to the government, depending on his income bracket and other factors. Since the tax is levied directly on John’s income, it is considered a direct tax.

Why Direct Tax Matters

Direct taxes are an important source of revenue for governments. They are used to fund public services, such as healthcare, education, and infrastructure. In addition, they are also used to redistribute wealth and reduce inequality. That means they are often progressive, meaning those with higher incomes pay a higher percentage of their income in taxes. This helps to ensure that everyone pays their fair share and that the burden of taxation is shared more evenly.