Which statement best describes direct and indirect taxes?

• A. Indirect taxes are paid directly by individuals
• B. Direct taxes are paid directly by individuals; indirect taxes are levied on goods and services
• C. Direct taxes are optional
• D. Indirect taxes are on property only

Answer: (B)

Direct taxes are paid straight to the government by individuals or entities based on their income or wealth, while indirect taxes are charged on goods and services and collected when you buy something. The statement that direct taxes are paid directly by individuals and indirect taxes are levied on goods and services captures this distinction clearly: direct taxes hit personal or corporate finances directly, and indirect taxes are embedded in prices of goods and services. For example, income tax and property tax are direct, while sales tax or VAT is indirect. The other choices mix up who pays or what is taxed—for instance, indirect taxes aren’t paid directly by individuals, direct taxes aren’t optional, and indirect taxes aren’t limited to property.