Lilly Bloom / Getty Images The federal income tax is a common direct tax. The amount of income tax you pay depends on how much you earn, whether you’re single or married, whether you have children or other dependents, and other factors. In general, the federal income tax brackets levy larger percentages of income tax on higher incomes and smaller percentages on lower incomes. This progressive tax system means that people who earn more money pay more income tax directly to the government. The excise tax on gasoline is a common type of indirect tax. The federal government charges an excise tax of 18.4 cents per gallon on gas, which is paid by the manufacturer but generally passed on to the retailer and then to the consumer. Taxes are a much-debated component of the economy. Still, generally speaking, they exist to fund various government programs and services such as Social Security, Medicaid, and other citizen well-being initiatives. They also help fund civic repairs, public transportation, and other beneficial services.
Example of a Direct Tax
If you own a home, your local government may charge a tax on your property—called a property tax. Let’s say that you own a home that’s valued at $300,000, and your town charges a $20 tax on every $1,000 of your home’s tax-assessed value. As a result, you would owe a direct tax of $6,000 per year to your local government ($300,000 / $1,000 = 300 * $20). The direct tax of $6,000 might be split up into monthly or quarterly payments.
Types of Direct Taxes
Direct tax is a broad term that includes several types of taxes paid directly to the government, including:
Income tax: You’ll pay a percentage of your earnings to the government as income tax. Everyone is subject to federal income taxes, and most states charge income tax as well. For example, in 2022, California charges up to 13.3%, while Texas and Washington don’t charge any income tax. Depending on where you live, you may also pay municipal income taxes. Capital gains tax: This is a form of income tax measured by how much value your assets have gained from the point of acquisition (when you bought them) to the point of sale. You’ll pay capital gains tax along with other taxes when you file your tax return. Property tax: Property tax is paid on each piece of property a taxpayer owns, including land, houses, and any other buildings. Property taxes are calculated based on the geographical location of the property, the market value of the land, and an estimate of the home’s value. Personal property tax: Some states, including Connecticut, Mississippi, and Virginia, also charge personal property taxes on movable items such as cars, boats, and RVs. If you live in one of these states, you may pay an additional direct tax based on the value of these items.
