Direct taxation may be imposed on income or wealth. Taxes on wealth may include property tax, estate tax, or wealth tax. Different types of direct taxes are imposed depending on the income, property, or financial activities of a taxpayer.
The following are important examples of direct taxes. However, in the United States, not all of these taxes necessarily satisfy the specific constitutional definition of a direct tax.
Income Tax
Income tax is one of the most important direct taxes in many developed countries. It is imposed on the income earned by taxpayers.
A certain amount of tax is collected from the income or wages of individuals. The amount of tax may depend on the applicable tax structure and the income of the taxpayer.
When income tax is imposed on corporations or business firms, it is known as Corporate Income Tax.
Thus, individual income tax applies to the income of individuals, while corporate income tax applies to the income or profits of companies and firms.
Transfer Taxes
Transfer taxes are imposed when property or wealth is transferred from one person to another.
The most common form of transfer tax is the Estate Tax. Estate tax is imposed on the taxable portion of the property of a deceased person.
A Gift Tax is another form of transfer tax. It is imposed when property is transferred by one person to another as a gift and the transaction falls within the applicable tax provisions.
Therefore, estate tax generally relates to the transfer of property after death, while gift tax relates to the transfer of property as a gift.
Entitlement Tax or Payroll Tax
Entitlement taxes or payroll taxes are direct taxes used to finance social security and health services.
These taxes are generally collected through payroll deductions. The tax amount is deducted through the payroll system from the earnings of individuals.
The importance of payroll taxes increased with the development and expansion of the welfare state during the twentieth century.
As governments expanded social security and health services, payroll taxes became an important source of financing for such programmes.
Property Tax
Property tax is a tax imposed on property such as land and buildings.
The tax liability arises because a person owns taxable property. Therefore, property tax is directly associated with the ownership of property.
Capital Gains Tax
Capital Gains Tax is imposed when an individual earns a gain from the sale of a capital asset.
Capital assets may include stocks, real estate, or a business.
The capital gain is generally determined by calculating the difference between the acquisition amount and the selling amount of the capital asset.
In simple terms:
Capital Gain = Selling Amount − Acquisition Amount
When the selling amount is higher than the acquisition amount, the difference represents the gain on which capital gains tax may be imposed.
Key Exam Points
Direct taxation may apply to income or wealth.
Income Tax is imposed on the income of taxpayers and is an important direct tax in many developed countries.
Income tax imposed on corporations and firms is known as Corporate Income Tax.
Transfer Taxes include Estate Tax and Gift Tax.
Estate Tax is imposed on the taxable portion of the property of a deceased person.
Gift Tax relates to the transfer of property from one person to another as a gift.
Entitlement or Payroll Taxes finance social security and health services and are generally collected through payroll deductions.
Property Tax is imposed on property such as land and buildings.
Capital Gains Tax is imposed on gains earned from the sale of capital assets such as stocks, real estate, or a business.
Capital gain is generally determined as the difference between the selling amount and acquisition amount.