User:Bracton/Sandbox/Direct tax

The term direct tax in the United States has more than one meaning:

• A tax collected directly from an individual by the government rather than through an intermediary;
• Any internal tax, as distinct from an external tax on imports;
• A tax that does not get passed through to a consumer as a higher cost of purchase;
• A tax that is susceptible to being apportioned without an unfair or absurd result;
• A constitutional interpretative doctrine arising from various court decisions.

Certain taxes may be direct taxes in one sense but indirect taxes in another.

In the United States, Article I, Section 9 of the Constitution requires that direct taxes imposed by the national government be apportioned among the states on the basis of population.

In the UK, direct tax refers to tax levied directly off of an organisation or an individual person, like income tax.

Collected directly

In one sense, a direct tax is one paid directly to the government by the persons (juristic or natural) on whom it is imposed (often accompanied by a tax return filed by the taxpayer). Examples include some income taxes, some corporate taxes, and transfer taxes such as estate (inheritance) tax and gift tax. In this sense, a direct tax is contrasted with an indirect tax or "collected" tax (such as sales tax or value added tax (VAT)); a "collected" tax is one which is collected by intermediaries who turn over the proceeds to the government and file the related tax return.

Internal tax

During the ratification debates on the U.S. Constitution most participants used the term most often to refer to internal taxes, as distinct from external taxes on imports. It could be either a tax collected directly from individuals by the central government, or as a requisition on the states which would collect them directly from individuals.

The "Pennsylvania Minority" presented this meaning in 1787:

“ The power of direct taxation will further apply to every individual, as congress may tax land, cattle, trades, occupations, &c. to any amount, and every object of internal taxation is of that nature, that however oppressive, the people will have but this alternative, either to pay the tax, or let their property be taken for all resistance will be vain. The standing army and select militia would enforce the collection. ”

The Anti-Federalist “Federal Farmer” argued,

“ ... but there is a strong distinction between external and internal taxes. External taxes are impost duties, which are laid on imported goods.... But internal taxes, as poll and land taxes, excise, duties on all written instruments, &c. may fix themselves on every person and species of property . . . [I]s it wise ... to vest the powers of laying and collecting internal taxes in the general government ... ? ”

Not passed through to consumer

Some commentators have argued that "a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be."

This meaning emerged from The Wealth of Nations by Adam Smith in 1776, who described direct taxes as those which could not be avoided by the individual, whereas other taxes might be avoided by not purchasing a taxed product or service. This came to be understood in terms of a "pass through" model of an direct tax as a tax that cannot be passed through to a purchaser, and an indirect tax as one that can be.

“ The impossibility of taxing the people, in proportion to their revenue, by any capitation, seems to have given occasion to the invention of taxes upon consumable commodities. The state, not knowing how to tax, directly and proportionably, the revenue of its subjects, endeavours to tax it indirectly by taxing their expense, which, it is supposed, will in most cases be nearly in proportion to their revenue. Their expense is taxed by taxing the consumable commodities upon which it is laid out. ...

Taxes upon luxuries are finally paid by the consumers of the commodities taxed without any retribution. They fall indifferently upon every species of revenue, the wages of labour, the profits of stock, and the rent of land.

”

The "Pennsylvania Minority" also presented this meaning in 1787:

“ The power of direct taxation applies to every individual, as congress under this government is expressly vested with the authority of laying a capitation or poll-tax upon every person to any amount. This is a tax that, however oppressive in its nature, and unequal in its operation, is certain as to its produce and simple in it collection; it cannot be evaded like the objects of imposts or excise, and will be paid, because all that a man hath will he give for his head. This tax is so congenial to the nature of despotism, that it has ever been a favorite under such governments. Some of those who were in the late general convention from this state, have long labored to introduce a poll-tax among us. ”

In 1794, Theodore Sedgwick, a pro-Hamiltonian Federalist Massachusetts state legislator, argued that a fixed-rate tax on a few selected goods was not direct. He conceded in his speech that unshiftable broad taxes on people were still direct.

Susceptible to being apportioned

Some commentators have used the term to refer to a tax that can be apportioned without producing a strongly unfair or absurd result, and thus not so much as a kind of tax defined by its objects or those on whom it is imposed, as by the feasibilty of being fairly collectible if apportioned by population. This was brought out in the 1796 case of Hylton v. United States, 3 U.S. 171 (1796), the first U.S. Supreme Court case that addressed the distinction. It was also discussed as one of the meanings in the 1895 Pollock case, along with the pass-through meaning (called the meaning of the "economists" or "political economists").

U.S. legal usages

In the United States, the term "direct tax" has had different meanings in various court decisions. Traditionally a direct tax was held to be a tax on property "by reason of its ownership" (such as an ordinary real estate property tax imposed on the person owning the property as of a certain date of each year) as well as a capitation, or"head" tax. Thus, an "event" tax such as an "excise" is an "indirect tax". In this sense, a transfer tax (such as gift tax and estate tax) is an indirect tax. Income taxes on income from personal services such as wages are also indirect taxes in this sense, but not in the sense of a burden that can be passed through to a purchaser. The United States Court of Appeals for the District of Columbia Circuit stated: "Only three taxes are definitely known to be direct: (1) a capitation [ . . . ], (2) a tax upon real property, and (3) a tax upon personal property."

National level

Whether "income" in some sense was direct or indirect was an open question in the late 1800s, when U.S. courts began to treat an income tax on earnings from property as a direct tax. After the 1895 Pollock ruling that taxes on income from property were direct taxes and thus had to be apportioned, it became infeasible for Congress to impose a national income tax that applied to all forms of income. The 1913 16th Amendment, provided that federal income taxes are not required to be apportioned, regardless of whether they are direct taxes (on income from property) or indirect taxes (on any other income).

State and local level

In 1796 a U.S. Treasury Department official, Oliver Wolcott, Jr., issued a report to the U.S. House of Representatives titled "Direct Taxes" in which he provided an inventory of state taxes then regarded as "direct". The taxes included capitation or "poll" taxes, but often at different rates for different kinds of people. They also included taxes on the possesion of land or various items of commerce, with rates that generally corresponded to the earning potential of the item. Religious ministers and others deemed dependent rather than commercially productive were often exempted. Some of the taxes were to be collected directly by state officials, but often by county officials, and sometimes the power to tax was delegated to county officials, with designations of amounts to be collected, usually in a way that corresponded to population, so that states sometimes had their own appropriation rules similar to that of the U.S. Constitution.

References

Sources

• Foster, Robert (1895). Commentaries on the Constitution of the United States: Historical and Judicial. Vol. 1. Boston: The Boston Book Co. pp. 415–423.

See also

• Indirect tax
• United Kingdom Corporation Tax
• Income tax in the United States