Taxation, the effect of which is intended to be borne by the person or organization that pays it. Economists distinguish between direct taxation and indirect taxation. The former is best illustrated by income tax, in which the person who receives the income pays the tax and his or her income is thereby reduced. The latter is illustrated by value added tax (VAT), in which the tax is paid by traders but the effects are borne by the consumers of the trader’s goods or services. In practice these distinctions are rarely clear cut. For example, corporation tax is a direct tax but its incidence can be shifted to consumers by higher prices or to employees by lower wages.
Subjects: Financial Institutions and Services — Accounting.