IB Economics HL Practice Test 2026 – Complete Exam Prep

The correct answer is direct taxation, which is imposed directly on individuals or entities based on their income, wealth, or profits. This type of taxation is characterized by the fact that taxpayers must pay it directly to the government, rather than having it collected through intermediaries like businesses or sales channels. Examples of direct taxes include income tax, corporate tax, and capital gains tax.

Direct taxation is typically progressive, meaning that higher income earners pay a higher percentage of their income in taxes compared to lower income earners, but it is not exclusively progressive in nature. Indirect taxation, on the other hand, refers to taxes imposed on goods and services, such as sales tax or value-added tax, which consumers pay indirectly through purchases. Regressive taxation describes a situation where lower-income earners pay a higher percentage of their income compared to higher earners, which is not the case with direct taxation as it generally aims at equity based on income levels.