Which statement best distinguishes direct taxes from indirect taxes?

• A. Direct taxes are taxes on earnings or wealth paid directly by the taxpayer; indirect taxes are taxes on goods/services paid by consumers
• B. Direct taxes are always on property; indirect taxes are always on income
• C. Direct taxes are the same as indirect taxes
• D. Direct taxes are only collected by the government

Answer: (A)

The main point here is who ultimately bears the cost of the tax and how it is imposed. Direct taxes are paid directly by the person or organization on whom the tax is assessed (for example, income tax or corporate tax). Indirect taxes are levied on goods or services and are paid indirectly by consumers, because businesses collect the tax at the point of sale and it shows up in prices (for example, VAT or sales taxes). So the distinction hinges on the path from tax to burden: direct taxes hit earnings or wealth directly, while indirect taxes are embedded in prices and paid by consumers.

The other statements don’t fit this distinction. Direct taxes are not limited to property, since income tax and other levies are classic direct taxes as well. Direct and indirect taxes are not the same thing, as they differ in who is legally responsible for paying the tax versus who ultimately bears the cost. And the idea that direct taxes are only collected by the government ignores the broader point about how the tax burden is distributed and how collection can vary in practice.