The main economic effect of direct taxes such as income tax and wealth tax falls primarily on which of the following variables?

Introduction / Context:
Direct taxes are taxes imposed directly on the income or wealth of individuals and companies, such as income tax and corporate tax. Understanding where the immediate burden of these taxes falls is important for analysing their impact on consumption, savings and investment. This question asks which economic variable is primarily affected by direct taxes.

Given Data / Assumptions:
- Direct taxes include income tax, corporate tax and wealth tax.
- These taxes are collected from the person or organisation on whom they are legally imposed.
- The options mention food prices, consumer goods, capital goods and income.

Concept / Approach:
The key feature of a direct tax is that it is levied on income or wealth at the point where it is earned or held. When a direct tax is collected, the taxpayer’s disposable income—that is, income after tax—is reduced. This reduction in disposable income can then influence demand for goods and services, savings and investment, but the primary and immediate effect is on income rather than on the price level of specific goods.

Step-by-Step Solution:
Step 1: Recognise that direct taxes are calculated on income or wealth figures. When you pay income tax, you are left with less net income to spend or save.Step 2: Examine option D, disposable income of individuals and entities. This directly captures the variable that is immediately affected by the imposition of direct taxes.Step 3: Consider option A, food prices. While changes in taxes can eventually affect demand and perhaps market prices, direct taxes are not primarily levied on goods, so food prices are not the direct focus.Step 4: Consider option B, consumer goods, and option C, capital goods. These refer to categories of goods that may experience changes in demand, but again, the initial impact of a direct tax is on the income of the taxpayer, not on these goods themselves.

Verification / Alternative check:
You can verify by looking at a simple pay slip. Gross salary is the total earnings. After deduction of income tax, the remaining amount is net pay or take home income, which is the disposable income available to the worker. Prices in the market do not change at the moment the tax is deducted; what changes is the person’s ability to purchase goods. This confirms that the main direct effect is on income.

Why Other Options Are Wrong:
Option A is wrong because food prices are more directly influenced by supply conditions, indirect taxes and distribution costs than by direct taxes on income. Option B and option C are wrong because, while demand for consumer and capital goods can be influenced indirectly by changes in income, they are not the primary variable on which the tax is imposed. The question asks about the main effect, which is on income.

Common Pitfalls:
Some students confuse direct and indirect taxes. Indirect taxes such as GST are levied on goods and services and can have an immediate impact on prices. Direct taxes, by contrast, alter the after tax income of individuals and firms. Keeping this distinction clear helps to avoid confusion in such questions.

Final Answer:
The main effect of direct taxes is on Disposable income of individuals and entities.