Tax

A tax is a compulsory charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e.g., tribes, secessionist movements or revolutionary movements). Taxes could also be imposed by a subnational entity.

Direct and indirect taxation

Taxes are sometimes referred to as direct or indirect. The meaning

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of these terms can vary in different contexts, which can sometimes lead

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to confusion. In economics, direct taxes refer to those taxes that

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are collected from the people or organizations on whom they are ostensibly imposed. For

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example, income taxes are collected from the person who earns the income.

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By contrast, indirect taxes are collected from someone other than

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the person ostensibly responsible for paying the taxes.

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From whom a tax is collected is a matter of law. However, who pays the tax is determined by the market place and is found by comparing the price of the good (including tax) after the tax is imposed to the price of the good before the tax was imposed. For example, suppose the price of gas in the U.S., without taxes, were $2.00 per gallon. Suppose the U.S. government imposes a tax of $0.50 per gallon on the gas. Forces of demand and supply will determine how that $0.50 tax burden is distributed among the buyers and sellers. For example, it is possible that the price of gas, after the tax, might be $2.40. In such a case, buyers would be paying $0.40 of the tax while the sellers would be paying $0.10 of the tax.

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In law, the terms may have different meanings. In US constitutional

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law, for instance, direct taxes refer to poll taxes

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and property taxes, which are based on simple existence or ownership. Indirect taxes are imposed on rights, privileges, and activities.

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Thus, a tax on the sale of property would be considered an indirect tax,

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whereas the tax on simply owning the property itself would be a direct tax.

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The distinction can be subtle, but it is important under US law, since

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the United States Constitution formerly required that direct taxes be apportioned according to population. That is, if one state had twice the population of another state, then the direct tax revenue from that state must be exactly twice that from the other state. In 1895, the

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US Supreme Court interpreted

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the income tax as a direct tax when applied to income from property,

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and struck down the tax as a result. The federal government then had

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no income tax until the Sixteenth Amendment was ratified, which removed the apportionment requirement for income taxes.

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