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What Is the Difference Between Income Tax, Excise Tax, and Direct Tax?

Unlike income taxes, excise taxes are tied to the purchase of specific products or services.
Income, capital gains and property taxes are all direct taxes, often calculated by the person who owes taxes.
Gasoline is often subject to an excise tax.
Property taxes are one form of direct tax.
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  • Written By: Jeany Miller
  • Edited By: O. Wallace
  • Last Modified Date: 15 November 2014
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A government may impose several different kinds of taxes on its citizens, including income and excise. Income tax is usually based on a person’s earned wages and may be levied with progressive, flat rate or regressive systems. An excise tax may be imposed on a country’s produced goods, although some governments levy these on imports as well. Whereas income tax is categorized as a direct tax, excise is considered that of an indirect tax. Direct taxes are paid directly by those who owe them, whereas indirect taxes are often added to the price of goods to reimburse sellers for their obligations.

Income tax is often levied on the wages earned by a person or legal entity, such as a corporation. In many instances, taxable income can be adjusted at the end of a fiscal or calendar year to allow for expenses and dependents. Various systems exist by which a government may levy individual income taxes. Progressive systems, for example, increase the tax rate as a person’s income increases. This system often shifts the burden of tax payments from people with lower paying abilities to people with higher wages.

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Unlike a progressive income tax, the flat tax system institutes a constant rate for all payers. Such a tax often imposes fewer guidelines and less administrative costs, although some people consider this system unfair to those with lower wages. A regressive income tax poses an inverse relationship between the tax levied and a person’s income. As a person’s income increases, his or her tax rate decreases. This system works in contrast to a progressive tax, as the burden is primarily carried by those earning fewer taxable dollars.

Excise taxes are those paid on the purchase of goods or services and are often reflected in total purchase prices. Examples of goods that may carry excise taxes include gasoline, alcohol and tobacco. A government often levies excise taxes on goods produced only within that country, although these types of taxes in Australia are placed on imported goods as well.

Sales taxes may be levied on top of excise taxes in the purchase of particular products or services. These two taxes are distinct in that excise taxes often apply to a specific range of products and may be levied as a measurable denomination. Sales tax, on the other hand, is likely to be proportionate to value and levied as a percentage in relation to price.

In addition to the products on which they are levied, income and excise taxes differ from each other in how they are imposed. Excise taxes are considered indirect, or consumption, taxes. Sales and value added taxes are further examples of indirect taxes, which are likely paid to the government by the producer or seller. In turn, that person or entity often tries to recover the tax by increasing the selling price of a good or service. Economists often consider indirect taxes to be regressive measures because they are not based on the ability to pay.

A direct tax, unlike that of indirect, is levied on the payer without a middle person. This may be in the form of income, capital gains or property tax, where the payer is directly responsible. One of the most notable characteristics of a direct tax is that responsibility for payment cannot be shifted, as producers do with sales tax. Specific data may be required on a person’s individual tax return to ensure all direct taxes are paid as expected.

Some governments impose a direct tax on the principle of ability to pay, such as with income taxes. Property taxes, although likely to be based on value, may operate on a progressive schedule in that they increase with the size and amenities of a property. Although direct tax is often defined in a similar manner by most governments, each nation may impose its own sanctions for who pays. In India, for example, direct taxes are charged on the basis of residential status rather than that of citizenship. In the European Union, member states presently levy direct taxes at the national level.

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