What is the primary distinction between direct taxes and indirect taxes?

The primary distinction between direct taxes and indirect taxes lies in who is responsible for paying the tax to the government and how it is applied. Direct taxes are imposed directly on individuals or organizations based on their income, wealth, or profits. This means that the taxpayer is the person or entity that ultimately bears the financial burden of the tax. Examples of direct taxes include income taxes, property taxes, and corporate taxes.

In contrast, indirect taxes are applied to goods and services rather than directly on individuals' income. These taxes are often included in the price of a product or service, and while consumers ultimately pay them when they purchase the item, the sellers collect and remit these taxes to the government. Common examples of indirect taxes include sales tax and value-added tax (VAT).

The distinction helps clarify how tax liabilities are structured in a given economy and the relationships between taxpayers and the tax authority. Recognizing this difference is fundamental in tax practice and understanding the broader implications of tax policy.