Direct tax

A direct tax is generally a tax paid directly to the government by the person on whom it is imposed.

General meaning

In a general sense, a direct tax is one imposed upon an individual person (juristic or natural) or property (i.e. real and personal property, livestock, crops, wages, etc.) as distinct from a tax imposed upon a transaction. In this sense, indirect taxes such as a sales tax or a value added tax (VAT) are imposed only if and when a taxable transaction occurs. People have the freedom to engage in or refrain from such transactions; whereas a direct tax (in the general sense) is imposed upon a person, typically in an unconditional manner, such as a poll-tax or head-tax, which is imposed on the basis of the person's very life or existence, or a property tax which is imposed upon the owner by virtue of ownership, rather than commercial use. Some commentators have argued that "a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be."

The unconditional, inexorable aspect of the direct tax was a paramount concern of people in the 18th century seeking to escape tyrannical forms of government and to safeguard individual liberty.

The distinction between direct and indirect taxation was first extensively discussed by Adam Smith in his Wealth of Nations, as in the following passage:

The Pennsylvania Minority, a group of delegates to the 1787 U.S. Constitutional Convention who dissented from the document sent to the states for ratification, objected over this kind of taxation, and explained:

U.S. constitutional law sense

In the United States, the term "direct tax" has acquired specific meaning under constitutional law: a direct tax is a tax on property "by reason of its ownership" (such as an ordinary real estate property tax imposed on the person owning the property as of January 1 of each year) as well as a capitation (a "tax per head"). Income taxes on income from personal services such as wages are indirect taxes in this sense. The United States Court of Appeals for the District of Columbia Circuit has stated: "Only three taxes are definitely known to be direct: (1) a capitation [ . . . ], (2) a tax upon real property, and (3) a tax upon personal property." In National Federation of Independent Business v. Sebelius, the Supreme Court held that a penalty directly imposed upon individuals for failure to possess health insurance, though a tax for constitutional purposes, is not a direct tax. The Court reasoned that the tax is not a capitation because not everyone will be required to pay it, nor is it a tax on property. Rather "it is triggered by specific circumstances."

In the United States, Article I, Section 2, Clause 3 of the Constitution requires that direct taxes imposed by the national government be apportioned among the states on the basis of population. After the 1895 Pollock ruling (essentially, that taxes on income from property should be treated as direct taxes), 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).

Direct taxation in other countries

Tax policy in the European Union (EU) consists of two components: direct taxation, which remains the sole responsibility of Member States, and indirect taxation, which affects free movement of goods and the freedom to provide services. With regard to European Union direct taxes, Member States have taken measures to prevent tax avoidance and double taxation. EU direct taxation covers, regarding companies, the following policies: common Consolidated Corporate Tax Base, common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (to avoid withholding tax when the dividend qualifies for application of the EC Parent-Subsidiary Directive, Financial transaction tax, interest and royalty payments made between associated companies and elimination of double taxation if the payment qualifies for application of the EC Interest and Royalties Directive. Regarding direct taxation for individuals, the policies cover taxation of savings income, dividend taxation of individuals and tackling tax obstacles to the cross-border provision of occupational pensions.

See also

• Indirect tax
• United Kingdom Corporation Tax
• Income tax in the United States

References

Sources

• Foster, Robert (1895). Commentaries on the Constitution of the United States: Historical and Judicial 1. Boston: The Boston Book Co. pp. 415-423. 

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