Direct taxes

by | Dec 20, 2023 | Definition | 0 comments

Direct taxes

When it comes to taxation, understanding the different forms of taxation is essential for taxpayers and tax law professionals alike. Direct taxes are at the heart of economic, social and political debates, because they have a direct impact on the income of individuals and companies.

What are direct taxes?

Direct taxes are compulsory levies collected by the State or local authorities on the resources of individuals and legal entities. Unlike indirect taxes, they are calculated according to the taxpayer’s financial capacity, as illustrated byincome tax orcorporation tax.

Characteristics of direct taxes

The main characteristic of direct taxes is that they are based on wealth or income. They are therefore collected at source, i.e. they are paid by the person on whom the tax is levied. Progressivity is also often associated with direct taxes, allowing higher taxation as income rises.

Examples of direct taxes

In France, there are several examples of direct taxes, such as personal income tax (impôt sur le revenu des personnes physiques – IR), property tax (taxe foncière), housing tax (taxe d’habitation – although this is currently being abolished for the majority of households) and real estate wealth tax (impôt sur la fortune immobilière – IFI).

The role of direct taxes in the economy

Direct taxes play a key role in wealth redistribution and economic regulation. They enable public services to be financed and tax burdens to be distributed according to the ability of individuals and companies to pay, thus embodying the principle of tax justice.

Calculating direct taxes

Direct taxes are generally calculated on the basis of tax returns submitted by taxpayers. Determination of the tax base, represented by taxable income or wealth, then gives rise to calculation of the amount due according to a progressive scale, pre-established tax rates and any tax allowances.

Family quota and taxation

Taking into account the taxpayer’s personal situation is one of the aspects of direct taxation, notably through the family quotient mechanism for income tax, which reduces the progressivity of taxation according to household composition.

Payment and collection of direct taxes

Direct taxes are paid on a regular basis, often by direct debit, and are collected by national tax authorities such as France’s Direction Générale des Finances Publiques.

Impact of direct taxes on taxpayers

Direct taxes have a direct and perceptible impact on household budgets and business cash flow. That’s why the issue of tax relief, via tax exemption schemes or measures such as the tax shield (abandoned in 2011), is a regular topic of debate.

Tax reforms

As tax legislation is constantly evolving, the direct taxation system is regularly subject to reform, such as the integration of the withholding tax for income tax in France from 2019, or the overhaul of wealth taxation.

Frequently asked questions

Here is a list of frequently asked questions about direct taxes:

What’s the difference between direct and indirect taxes?

The fundamental difference lies in the mode of perception. Direct taxes are levied directly on taxpayers’ income or wealth, while indirect taxes are levied on transactions, such as VAT or excise duties.

Can I be exempt from direct taxes?

Certain situations may lead to exemption from direct taxes, such as income below a minimum threshold, tax residence status in certain areas, or special situations provided for by law or tax treaties.

How do direct taxes influence investment and savings?

Direct taxes can influence the investment and savings decisions of individuals, notably through the level of taxation on capital gains or income, encouraging savers to orient their choices according to the tax advantages available.

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