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What is the Difference Between Income Tax, Excise Tax, and Direct Tax?

By Jeany Miller
Updated May 16, 2024
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A government may impose several different kinds of taxes on its citizens, including income and excise. Income tax is usually based on a person’s earned wages and may be levied with progressive, flat rate or regressive systems. An excise tax may be imposed on a country’s produced goods, although some governments levy these on imports as well. Whereas income tax is categorized as a direct tax, excise is considered that of an indirect tax. Direct taxes are paid directly by those who owe them, whereas indirect taxes are often added to the price of goods to reimburse sellers for their obligations.

Income tax is often levied on the wages earned by a person or legal entity, such as a corporation. In many instances, taxable income can be adjusted at the end of a fiscal or calendar year to allow for expenses and dependents. Various systems exist by which a government may levy individual income taxes. Progressive systems, for example, increase the tax rate as a person’s income increases. This system often shifts the burden of tax payments from people with lower paying abilities to people with higher wages.

Unlike a progressive income tax, the flat tax system institutes a constant rate for all payers. Such a tax often imposes fewer guidelines and less administrative costs, although some people consider this system unfair to those with lower wages. A regressive income tax poses an inverse relationship between the tax levied and a person’s income. As a person’s income increases, his or her tax rate decreases. This system works in contrast to a progressive tax, as the burden is primarily carried by those earning fewer taxable dollars.

Excise taxes are those paid on the purchase of goods or services and are often reflected in total purchase prices. Examples of goods that may carry excise taxes include gasoline, alcohol and tobacco. A government often levies excise taxes on goods produced only within that country, although these types of taxes in Australia are placed on imported goods as well.

Sales taxes may be levied on top of excise taxes in the purchase of particular products or services. These two taxes are distinct in that excise taxes often apply to a specific range of products and may be levied as a measurable denomination. Sales tax, on the other hand, is likely to be proportionate to value and levied as a percentage in relation to price.

In addition to the products on which they are levied, income and excise taxes differ from each other in how they are imposed. Excise taxes are considered indirect, or consumption, taxes. Sales and value added taxes are further examples of indirect taxes, which are likely paid to the government by the producer or seller. In turn, that person or entity often tries to recover the tax by increasing the selling price of a good or service. Economists often consider indirect taxes to be regressive measures because they are not based on the ability to pay.

A direct tax, unlike that of indirect, is levied on the payer without a middle person. This may be in the form of income, capital gains or property tax, where the payer is directly responsible. One of the most notable characteristics of a direct tax is that responsibility for payment cannot be shifted, as producers do with sales tax. Specific data may be required on a person’s individual tax return to ensure all direct taxes are paid as expected.

Some governments impose a direct tax on the principle of ability to pay, such as with income taxes. Property taxes, although likely to be based on value, may operate on a progressive schedule in that they increase with the size and amenities of a property. Although direct tax is often defined in a similar manner by most governments, each nation may impose its own sanctions for who pays. In India, for example, direct taxes are charged on the basis of residential status rather than that of citizenship. In the European Union, member states presently levy direct taxes at the national level.

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Discussion Comments

By anon1006575 — On Apr 06, 2022

You are dead wrong about the federal income tax being a direct tax! In spite of the 16th Amendment (which did not amend the Constitution one bit, but corrected a legal error by the Supreme Court ). A direct tax is prohibited by the Constitution except it be levied by apportionment to the 50 States. That has happened only 2 or 3 times in the nation's history because it's so difficult to do. Instead, the tax is an excise tax that affects only funds earned through or because of some privileged connection with the federal government. It's privilege tax. Despite what the IRS labors hard to make you believe, you cannot be taxed on earnings otherwise earned! Most especially you cannot be taxed for making a living!

The cold, hard facts about the "income" tax are contained in a remarkable book first issued in 2003 and is now in its 15th printing. it's titled, "Cracking the Code--the Fascinating Truth About Taxation in America."

By anon1004948 — On May 20, 2021

This article has a big error. The income tax in the U.S. is an excise (privilege) tax on the exercise of federal privilege. It has never been a direct tax. If it were a direct tax, it would have to be apportioned among the states, since the Constitution requires that (in 2 different areas), and it has never been repealed. The 16th Amendment did not do what you think it did. Search the web for: LostHorizons 16th

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