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Governments and taxing entities impose direct taxes directly on individuals and businesses.

The payment of a direct tax goes straight to an entity such as the IRS. Indirect taxes are levied directly on goods or services, not an individual or company. An example of an indirect tax is sales tax charged on groceries.

A direct tax cannot be shifted to another entity. An indirect tax can. The grocery store charges an indirect tax on the groceries its customers buy, and it sends that money to the taxing entity.

A direct tax can be applied progressively. For example, the first $50,000 of an income might be taxed at 10%. The next $30,000 at 12%, and the next $20,000 at 15%. Higher earners pay more, based on their incomes.

Direct taxes are usually transparent and certain. It’s important for businesses and individuals to know the direct taxes they will owe each year.

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