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| Direct Tax What Is a Direct Tax? A direct tax is a tax that a person or organization pays directly to the entity that imposed it. An individual taxpayer, for example, pays direct taxes to the government for various purposes, including income tax, real property tax, personal property tax, or taxes on assets. KEY TAKEAWAYS A direct tax is paid by an individual or organization to the entity that levied the tax. Direct taxes include income taxes, property taxes, and taxes on assets. There are also indirect taxes, such as sales taxes, wherein a tax is levied on the seller but paid by the buyer. Understanding a Direct Tax Direct taxes in the United States are largely based on the ability-to-pay principle. This economic principle states that those who have more resources or earn a higher income should bear a greater tax burden. Some critics see that as a disincentive for individuals to work hard and earn more money because the more a person makes, the more taxes they pay. Direct taxes cannot be passed on to a different person or entity. The individual or organization upon which the tax is levied is responsible for paying it. The History of Direct Taxes The modern distinction between direct taxes and indirect taxes came about with the ratification of the 16th Amendment to the U.S. Constitution in 1913. Before the 16th Amendment, tax law in the United States was written so that direct taxes had to be directly apportioned to a state's population.1 A state with a population that is 75% of the size of another state's, for example, would only be required to pay direct taxes equal to 75% of the larger state's tax bill. This antiquated verbiage created a situation in which the federal government could not impose many direct taxes, such as a personal income tax, due to apportionment requirements. However, the advent of the 16th Amendment changed the tax code and allowed for the levying of numerous direct and indirect taxes. |