What is direct tax?

Direct tax is paid directly to the government and cannot be shifted to another payor

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Individuals and companies pay certain types of taxes directly to the entity that levies the tax – most typically the U.S. government through the IRS. Direct taxes make up most of the taxes levied by the federal government. They play a key role in funding social programs and many of America’s most important institutions. In this article, we’ll look at what a direct tax is, the different types of direct taxes and who pays them.

Key insights

The U.S. tax system includes both direct and indirect taxes.

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Individuals and companies pay direct taxes to the levying entity.

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There are different types of direct taxes, including income tax, corporate tax, property tax and estate tax.

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How does direct tax work?

A direct tax is paid directly by the taxpaying entity to the levying entity. The taxpaying entity could be an individual, partnership, corporation, trust or estate. The levying entity could be the federal government as the IRS, a state tax authority or even your local City Hall.

Direct tax has two hallmarks. First, the tax is paid by the person or other entity that incurs it. For example, most U.S. employees pay their own income tax. One exception is teenagers with part-time jobs whose earnings go on their parent’s return, but for the most part, if it’s your tax, you pay it.

The second characteristic of direct tax is that there is generally no way to avoid it. You cannot escape paying income or property taxes – they come as a natural part of earning money or owning property. There are ways to reduce the tax, such as through income tax credits or a property tax homestead exemption, but they cannot be legally evaded. If you try to avoid direct taxes, you can end up owing a lot of money in back taxes.

Types of direct tax

There are a few broad categories of direct taxes. All of them can exist at federal, state or local levels.

Income tax

This is the tax we think of most often when it comes to direct taxes. At the federal level, income tax is levied by the IRS. Most states also have some form of personal income tax, and some large cities even have a city income tax. Since it is a direct tax, every American with income must file their income taxes. The amount is based on a percentage of the income earned.

The U.S. income tax system is progressive, meaning that lower-income Americans will pay a lower percentage rate than high-earners. This makes it less straightforward than a flat tax system would be, but it offers relief for low-income taxpayers while still maintaining funding for important projects.

Corporate tax

In addition to the individual income tax, the IRS and most state taxation agencies also levy an income tax on corporations. Like the individual income tax, this is a tax based on value generated in the form of corporate income. As of 2024, the federal corporate tax rate is 21% of the corporation’s taxable income.

This is in addition to other taxes paid by corporations and other businesses, such as employment taxes, which vary based on the number and type of employees in the business.

Property tax

Property taxes are levied at the municipal level and generally are calculated as a percentage of the property’s value. The percentage will vary based on the revenue needs of the city. Various state subsidies, homestead exemptions and other income sources for the city may help to lower property taxes, but as a property owner, there is no way to completely avoid them.

Estate tax

An estate is a person’s net worth left behind after they die. Like most other forms of value, estates are also subject to a direct tax. According to the IRS, “Estate Tax is a tax on your right to transfer property at your death.” The estate tax is paid out of the value of the estate by the executor, or person who manages the estate.

While estate taxes can become quite exorbitant, they aren’t something most Americans have to worry about. If your net worth when you die will be less than around $13 million, you will owe no estate tax. However, for high-net-worth individuals who will owe estate tax, there are things you can do to lower that tax. A professional tax advisor should help you navigate that.

Direct tax vs. indirect tax

There is another kind of tax to be aware of, and that’s indirect tax. Sales taxes, excise taxes, gas taxes and customs taxes are all types of indirect taxes. Indirect taxes are generally based on consumption, and the tax ends up being passed along the supply chain until it is finally paid by the consumer.

Dennis Shirshikov, a professor of economics at the City University of New York, defined the difference between direct and indirect tax as the source of the tax. “Direct taxes, such as income tax, are levied on individuals and entities directly based on their earnings,” he explained.

“These taxes are progressive, aiming to distribute the tax burden more equitably among taxpayers based on their ability to pay. Indirect taxes, on the other hand, such as sales tax and excise taxes, are levied on the sale of goods and services,” said Shirshikov.

Sales and gas taxes are good examples of indirect taxes. The retailer or manufacturer is the one who actually “mails the check” for the tax to the government, but the money isn’t coming out of their pockets. The tax gets added to the sales price when the item (or gallon of gas) is sold, and it is truly paid by the buyer of the item. The retailer collects the tax at the time of sale and sends it to the government without actually adding any of their own money.

You pay indirect taxes every time you go shopping, buy gasoline or make a large purchase such as a car. There are also indirect taxes on items such as alcohol and cigarettes that make these items less desirable to buy.

Pros and cons of direct tax

Like any form of taxation, direct tax has both advantages and disadvantages.


  • Easy to understand
  • Can be progressively structured
  • Offers opportunities for tax credits to incentivize behavior


  • Can discourage taxpayers from certain activities
  • No way to avoid the responsibility for tax
  • Can encourage evasive behavior to avoid tax

Owe the IRS thousands? See if you qualify for relief.


    Who is responsible for paying direct taxes?

    The entire population affected by the direct tax is responsible for paying their levied portion of the tax. For example, all U.S. employees with an income are responsible for their income taxes. All Americans with property are responsible for their property taxes.

    How are direct taxes calculated?

    Direct taxes are generally calculated as a percentage of the value created. For example, property taxes are generally a percentage of the value of the property. Income taxes are a percentage of the income earned. In some cases, the percentage is progressive, meaning that lower-income taxpayers pay a lower percentage, while wealthier taxpayers pay a higher rate.

    What happens if direct taxes are not paid?

    The IRS as well as state and local tax authorities have various fines and penalties if direct taxes are not paid. Late fees and interest will accrue on unpaid balances. Large-scale tax evasion or tax fraud due to understating or hiding income may result in even larger fines and possible jail time.

    What is the ability-to-pay principle?

    The ability-to-pay principle refers to the idea that taxes be distributed according to the capacity of individuals to bear the cost. According to this principle, those with greater income and wealth should pay more taxes than those with lower incomes. The term is sometimes used interchangeably with progressive taxation.

    Bottom line

    Direct taxes are paid directly from the individual or company to the entity that levies the tax. The most common instance is income tax paid to the government, though there are other types as well. These include property tax, estate tax and corporate tax. Unlike indirect tax, direct tax cannot be passed on to another payer.

    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. IRS, “Publication 542 (01/2024), Corporations.” Accessed Feb. 25, 2024.
    2. FindLaw, “Tax Evasion Penalties and Other Consequences.” Accessed Feb. 26, 2024.
    3. IRS, “Estate Tax.” Accessed Feb. 27, 2024.
    4. Tax Foundation, “Indirect Tax.” Accessed Feb. 27, 2024.
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