How do direct and indirect taxes differ?

The distinction between direct and indirect taxes is fundamental in understanding tax systems. Direct taxes are taxes imposed directly on an individual's or entity's income, wealth, or property. Examples include income tax and corporation tax. These taxes depend on the ability to pay and are typically assessed based on income levels or property values. This means that the taxpayer is responsible for paying the tax directly to the government.

On the other hand, indirect taxes are levied on goods and services rather than on income or profits. These taxes are included in the price of goods and services and are passed on to the consumer, who ultimately bears the cost. Examples of indirect taxes include value-added tax (VAT) and sales tax.

This distinction is crucial for understanding how different types of taxes affect consumers and businesses, as well as how they are collected and administered. In this context, the chosen answer accurately reflects that direct taxes target income, while indirect taxes relate to the consumption of goods and services.

The other statements do not accurately capture the nature of these tax types. Such inaccuracies include misrepresenting the basis for taxation (like transactions versus income) or incorrectly categorizing the tax obligations of individuals and corporations. Additionally, all taxes, whether direct or indirect, are generally mandatory rather than