Which of the following situations is an example of indirect taxation?

• A. A government requires individuals to pay income tax on their earnings.
• B. A homeowner pays property tax to the local municipality.
• C. A corporation pays a tax on its annual profits.
• D. A government imposes a sales tax on retail purchases.

Answer: (D)

Verified step by step guidance

1. Understand the difference between direct and indirect taxes: Direct taxes are paid directly to the government by the individual or entity on whom they are imposed, such as income tax or property tax. Indirect taxes are collected by an intermediary (like a retailer) from the person who ultimately bears the tax burden, such as sales tax or value-added tax (VAT).
2. Identify the nature of each tax mentioned: Income tax, property tax, and corporate profit tax are all examples of direct taxes because they are paid directly by the individual or corporation to the government.
3. Recognize that a sales tax is collected by retailers when consumers purchase goods or services, and then passed on to the government. This makes it an indirect tax because the tax is not paid directly by the consumer to the government but through the retailer.
4. Conclude that the situation where the government imposes a sales tax on retail purchases is an example of indirect taxation, as the tax is embedded in the price of goods and collected via an intermediary.
5. Summarize that indirect taxes affect the price of goods and services and are ultimately paid by consumers, whereas direct taxes are levied directly on income, property, or profits.