RTBECO Circular Flow Practice Test

Direct taxes are the money flow described as a percentage of income paid by households to the government. These taxes are taken directly from what households earn, like income taxes, so the amount depends on how much income a household has. Indirect taxes are charged on goods and services and become part of prices—not taken directly as a share of income. Transfer payments and subsidies move money from the government to households or producers, not from households to the government. So, the flow where households pay a portion of their income to the government is direct taxes.