Direct Tax Definition

There are many different forms of taxation that are currently used throughout the world. In particular, governments are continually devising new ways of collecting tax revenue, and more importantly, collecting this revenue as efficiently as possible. As a result, direct taxation has become increasingly important in most tax collecting systems. However, direct taxation has significant differences from other styles of taxes. 

Indirect Taxes

These are the most commonly used taxes in the world. Generally, this is a broad form of taxation. Under this style of taxation, a third party is responsible for collecting the tax revenue and passing this revenue onto the government. There are numerous examples of this style of tax system. In particular, sales taxes and value added taxes are the most commonly used indirect tax systems. However, these systems are extremely inefficient. The government must spend a large portion of the revenue collected to oversee that all applicable tax codes are being followed. In other words, the government must support a large bureaucracy to oversee that indirect taxes are being collected and properly distributed to the correct governmental department.

 Direct Taxes

Direct Taxes are any taxes that individuals or companies pay directly to the government. The most common example of this style of taxation is an income tax. These taxes are paid directly to a government agency. The primary benefit of a direct tax is its increased efficiency. In other words, the government does not have to spend as many resources on overseeing the enforcement of the tax codes. There are numerous other examples of direct taxes. Outside of an income tax, the most commonly used direct taxes are licenses. Driver's licenses and business licenses are generally the most commonly administered licenses by state and federal governments.