The Major Difference between Direct and Indirect Tax

3d tax pie chartPeople all over the world have been paying taxes since times immemorial, but many people have never fully understood the taxes that they pay. Millions of people simply accept taxes as a reality in their lives without questioning where the taxes come from, what they go toward, and most important–who pays them.

In fact, there are two very distinct varieties of taxation in the world today. On one hand, there are direct taxes; on the other, indirect taxes. These two kinds of taxes are very similar in many ways, but they have an important difference which should be noted.

Direct taxes are most familiar to the general public. For example, anyone who pays income tax every year is already paying a direct tax to their government. A direct tax is one that is imposed on an individual or group, and collected directly from that individual or group. The government imposes an income tax for those citizens who earn income in the country. It then collects the income tax directly from those who earn income. This is a classic example of direct tax.

This brings up an important question. If direct tax is imposed directly on a group and collected directly from them, what could an indirect tax be? In general terms, an indirect tax is one that is imposed and collected in a more abstract fashion. Think of sales tax as an example. No one is actually being taxed directly here. Rather, the government is taxing a transaction between merchant and customer. The merchant is actually responsible for paying this tax, but it is the customer that most often feels its effect. This is why most businesses in the United States charge sales tax on their goods.

Many indirect taxes exist in our lives. Sales of products like tobacco, alcohol and gasoline, for example, are taxed by the government. However, the average consumer knows very little about these taxes. Indirect taxes like these often change in accordance with what the market can bear. Businesses that can afford to absorb more of the taxes on these products can afford to offer them at lower prices. In this way, the indirect taxes can have a very strong influence on business economy.

The difference between direct and indirect taxes is a somewhat unusual one, but it is nevertheless important to understand. Both of these kinds of taxes have strong effects on our daily lives and business transactions, and they won’t go away no matter how much we ignore them. In order to be a responsible and informed consumer, it is essential to understand the difference between direct and indirect taxes. These taxes influence the economy as much as they are influenced by it, and they should always be given due consideration.

It is every citizen’s right and responsibility to understand the taxes that affect their lives. While you figure out your tax code for 2013/2014, get your finances together, and prepare for your annual filings, be sure to keep this information in mind. Knowing the difference between direct and indirect tax allows you to figure out how much you are really paying.