I'm not exactly sure where to put this question... I am trying to figure out the difference between "direct" and "indirect" taxes in the context of some historical taxes I'm learning about in an American Politics class, which my book claims part of the cause of the American Revolutionary War. There seem to be several different definitions of these phrases scattered about on the Internet. Can somebody help clarify the meanings of these phrases?

  • 4
    A direct tax is when the government collects the money from the victim. An indirect tax is when the government gets somebody else to do their dirty work for them. Aug 24 '14 at 0:13
  • So the British government sold the stamped paper directly to everybody? They didn't use companies to do it? Also, I've read online that income tax is not considered a direct tax by the US government, and the term is more or less arbitrarily defined by them when it comes to talking about the US. I guess I will have to talk to my professor about it. Hopefully she isn't a shill!
    – Broseph
    Aug 24 '14 at 17:02
  • A direct tax is a tax imposed directly on an entity (such as today's US income tax). The stamp act would have required a lawyer to purchase stamped papers, and the lawyer had to pay the tax directly, he could not pass the tax on to be paid for by the lawyers client. He could raise his rates, but the tax itself had to be paid by the lawyer. If the stamp act was an indirect tax, the lawyer would purchase stamped papers, and collect monies from the customers of the lawyer to then pay the tax.
    – CGCampbell
    Aug 24 '14 at 18:05
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    An indirect tax is a tax imposed on an event (usually) (such as today's sales tax, import tax, vat tax). These taxes can be passed on from the merchant to be paid by the end person. The US government charges a sales tax on (certain) items being sold. The store doesn't pay the tax, directly, until it has charged it to the customer. It collects the money and then pays the government the collected taxes.
    – CGCampbell
    Aug 24 '14 at 18:08

The direct/indirect distinction is minorly anachronistic. As Bernard Bailyn discusses at length, the colonists denounced the Stamp Act (1765) as an internal tax, claiming that Parliament only had the right to levy external taxes. External taxes affected international trade, whereas internal taxes affected colonial affairs—and because the colonists had no representatives in Parliament, Parliament had no right to levy internal taxes.

As colonists developed their arguments for the illegitimacy of external taxes, their reasoning had less to do with trade per se than with the distinction between unavoidable (direct) and avoidable (indirect) taxes. Here’s Ben Franklin, being examined by Parliament in 1766:

Q. You say the colonies have always submitted to external taxes, and object to the right of parliament only in laying internal taxes; now can you show that there is any kind of difference between the two taxes to the colony on which they may be laid?

Franklin: I think the difference is very great. An external tax is a duty laid on commodities imported; that duty is added to the first cost, and other charges on the commodity, and when it is offered to sale, makes a part of the price. If the people do not like it at that price, they refuse it; they are not obliged to pay it. But an internal tax is forced from the people without their consent, if not laid by their own representatives. The Stamp Act says, we shall have no commerce, make no exchange of property with each other, neither purchase nor grant, nor recover debts; we shall neither marry nor make our wills, unless we pay such sums, and thus it is intended to extort our money from us, or ruin us by the consequences of refusing to pay for it.

Q. But supposing the [external] tax or duty to be laid on the necessities of life imported into your colony, will not that be the same thing in its effects as an internal tax?

Franklin: I do not know a single article imported into the northern colonies, but what they can either do without or make themselves.

Franklin’s argument can be summed as: Any American can avoid external taxes on imported goods by foregoing consumption or turning to household production, so such taxes are legitimate. An internal tax placed on official documents or other necessities is a mandatory and unavoidable tax, thus it is illegitimate.

Thus Franklin’s reasoning about internal taxes really has more to do with how avoidable the tax is. Accordingly, secondary sources will sometimes annotate colonists' language to explain that when they say "internal tax" they actually mean "direct tax." However, the language of “direct tax” wasn’t current until a few years later (see Google Ngram below).

And anyway, it wasn't ultimately the “direct” or “internal” aspect of the Stamp Act that angered the colonists. They objected to taxation without representation. This became clear when Charles Townshend took the colonists at their word and drafted a series of acts that would raise money by levying "external" duties on glass, lead, paper, paint, and tea, believing that the colonists objected merely to internal taxes. This belief was false, as we all know how the colonists responded to that famous tea tax.

Google Ngrams aren't perfect for this era, but I think this is informative. "Internal" is more common than "direct" until the end of the Revolutionary War:

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