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The difference between a direct and indirect tax is complicated because it truly depends on whether you are asking from a “legal” or an “economic” perspective.
From an Economic Perspective
In economics,
· A direct tax will refer to any levy that is both imposed and collected on a specific group of people or organizations. An example of direct taxation would be income taxes that are collected from the people who actually earn their income.
· Indirect taxes are collected from someone or some organization other than the person or entity that would normally be responsible for the taxes. A sales tax, for instance, would not be considered a direct tax because the money is collected from merchants, not from the people who actually pay the tax (the consumers).
In this economic context, the law may actually determine the person or entities from which the tax will be collected, but has nothing to do with how that tax burden is distributed in the market. Who bears the economic burden of the tax itself will be determined by market forces and can be calculated by comparing the price of the goods after the tax has been imposed with the price of the goods prior to the tax being in place.
For example, if the price of a gallon of gasoline was $2.50 without taxes and the government suddenly imposed a $0.40 tax, the economic forces of supply and demand would ultimately decide how this new burden is distributed between buyers and sellers. For instance, the price could increase to $2.75 per gallon after the tax, with buyers absorbing $0.25 of the increase and sellers the remaining $0.15. The law may have imposed the tax but the marketplace ultimately decided how it would be distributed.
From a Legal Perspective
In a legal sense, the meaning of direct and indirect taxes changes:
· A direct tax, according to the U.S. Constitution, applies only to property and poll taxes. These direct taxes are based on simple ownership or existence.
· Indirect taxes are imposed upon a broad range of abstract ideas, including rights, privileges, and activities.
In this sense, a tax on the sale of property would be considered an indirect tax while the tax actually owed on the property would be direct.
A direct tax is one paid directly to the government by the persons (juristic 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.
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)
HE INDIRECT COULD BE TRANSFERED TO ANOTHER PAYER BUT THE DIRECT NOT
