what is a direct tax 
a direct tax is a tax that a person or organization pays directly to the entity that imposed it examples include income tax real property tax personal property tax and taxes on assets all of which are paid by an individual taxpayer directly to the government investopedia zoe hansenunderstanding a direct taxdirect 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 of progressive or ability to pay taxation see it 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 1a direct tax is the opposite of an indirect tax wherein the tax is levied on one entity such as a seller and paid by another such as a sales tax paid by the buyer in a retail setting both kinds of taxes are important revenue sources for governments 1examples of indirect taxes include excise duties on fuel liquor and cigarettes as well as a value added tax vat also referred to as a consumption tax the history of direct taxesthe 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 23 a state with a population that was 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 23examples of direct taxescorporate taxes are a good example of direct taxes if for example a manufacturing company reports 1 million in revenue 500 000 in the cost of goods sold cogs and 100 000 in operating costs its earnings before interest taxes depreciation and amortization ebitda would be 400 000 if the company has no debt depreciation or amortization and has a corporate tax rate of 21 its direct tax would be 84 000 400 000 x 0 21 84 000 an individual s federal income tax is another example of a direct tax if a person makes 100 000 in a year for example and owes the government 20 000 in taxes that 20 000 would be a direct tax there are a number of other direct taxes that are common in the united states such as the property taxes that homeowners are required to pay those are typically collected by local governments and based on the assessed value of the property other types of direct taxes in the u s and elsewhere include use taxes such as vehicle licensing and registration fees estate taxes gift taxes and so called sin taxes on liquor and cigarettes for example 