Direct Tax Definition

Direct tax, defined as a tax directly on the amount of a taxable item, is the current tax method of the U.S.A. Currently in the U.S., this includes taxes wages, property, capital gains, or directly to the amount of some other valuable item. In some situations, direct tax credits are also given to those who need or would benefit from decreased tax income.

Direct Tax Explanation

Direct tax, explained as a tax on valuables, differs greatly from indirect tax. Where indirect tax taxes a factor which does not directly increase the wealth of the individual, like consumption, direct tax places a tax on the factors that increase wealth in a person’s life. This is the difference of direct tax vs indirect tax.

Direct Tax Advantages

Direct tax advantages are numerous. With a direct tax, the government closely knows the amount to be taxed and the amount applied. Direct tax cuts out a liaison, preventing corruption of lower level tax officials. Additionally, many argue that direct tax apportionment creates a civic sense; that people think in terms of the community rather than themselves.

Direct Tax Disadvantages

Direct tax disadvantages also exist. Under direct taxation, people are taxed based on their assumed ability to pay taxes. This means that the certain members of the population receive a disproportionately larger amount of taxation that others. Additionally, direct tax allows the tax rate of individuals to be decided by government rather than their actions. These two factors relate to the common opinion that direct tax can be demotivational. With an indirect tax, like a flat consumption tax, people are taxed based on their amount of consumption. With a direct tax, people are taxed based on the amount of wealth they build. Some argue that this causes the benefits of productivity to be decreased, thus providing a disincentive to produce as much as possible.

Direct Tax Example

For example, Nancy is a financial adviser. She helps others make investments which improve their wealth. Thus, Nancy believes she is helping others to live the best life they can.
Nancy deals with direct tax code often. First, her personal wages fall under direct taxation. Next, the property her clients invest in experiences a direct tax in the form of property tax. Additionally, the financial instruments, which hold the wealth of her clients, fall under direct taxation. When they receive capital gains, they pay a certain portion to the government as tax.
Nancy sometimes questions the government for the method of direct taxation. Despite this, she knows that direct taxation is here to stay. She also knows that the government engages in projects which are important to the people. Though she does not agree with all of the tax laws, she accepts it as a part of her life and still seeks to be the best financial adviser she can.

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