Direct tax facts for kids
A direct tax is a tax paid directly to the government by a person or organization. A direct tax may not be passed on to another person or entity but must be paid by the entity responsible for the tax. A direct tax is different from an indirect tax, which is paid by someone other than the person or entity who would normally be responsible for it. For example, a tax owed on a piece of property is a direct tax. A tax on the sale of that property would be considered an indirect tax.
An income tax is a tax that governments levy on individuals and businesses on their income. In the US and other countries, businesses and individuals need to file an Income Tax Return every year. This is to report all forms of income and to see if they owe any tax or can get a tax refund. Income tax is an important source of funds to most levels of government.
The 16th Amendment
In the United States Constitution, the difference between indirect and direct taxes was important enough to require a Constitutional amendment in order for the federal government to levy an income tax. This was the Sixteenth Amendment which was ratified in 1913. Before the Sixteenth Amendment, any direct tax levied by the federal government had to be apportioned among the states by population. As apportionment by population proved to be virtually impossible, levying direct taxes was prevented by this article of the Constitution until it was changed in 1913. So the federal government relied on indirect taxes such as tariffs and Duties on imported goods and materials.
Another form of direct tax is the corporation tax. This is a tax on profits earned by corporations and other companies. In the United States the federal corporate tax is a direct tax, but is different from income tax. It taxes net income (profits) not gross income (on which income taxes are based). Corporate tax allows deductions for most expenses of doing business. Also, it only applies to corporations. It does not apply to partnerships or sole proprietorships.
Property tax, also called millage tax, is a tax on property that the owner must pay. They are usually collected by local governments and are based on a standardized value of a property. Property tax money is usually used for schools, community safety and local infrastructure. Millage rates refer to the mill: one one-thousandth of a dollar. The millage rate is the amount of taxes levied per $1,000 of property value. For example, if the millage rate is 3 mills (or 3 tenths of a penny), a property valued at $300,000 would be a tax of $900.
Direct tax Facts for Kids. Kiddle Encyclopedia.