Most funds that governments use to function and to meet people's needs come from the tax money paid by individuals and businesses. Here we tell you what taxes are and what they’re used for.
Taxes are a central part of the financial transactions we make every day. Whether it’s paying for groceries, buying a house or filling up at the petrol station, a portion of the money we spend goes towards keeping where we live in ticking over.
Taxes are the money a person or business must pay tax authorities to help fund public spending. Taxpayers make payments according to the tax laws of their country, without expecting anything directly in return.
We may think of taxes as a modern inception; but they were already being collected in Ancient Egypt, Greece and Rome in order to build villages, roads and aqueducts. Governments use taxes to pay for internal operations, new infrastructure, public health, education and security.
Some everyday tax-related terms aren’t always clear. Knowing what they mean will help us understand better how taxes work and are calculated.
What are direct and indirect taxes?
Taxes vary in each country. They’re easier to understand if we think of how we pay them. They can be direct or indirect.
The taxes that a person or business pays on income or assets. They’re direct because they’re charged to a taxpayer and calculated based on their ability to pay. Salaries, returns on investments, company revenue, cash prizes and property appreciation are some examples. In Spain, income tax is known as Impuesto de Renta sobre las Personas Físicas ("IRPF") and corporate tax as Impuesto de Sociedades ("IS"). In Mexico, the income tax people and businesses pay is the Impuesto sobre la Renta ("ISR").
Indirect taxes do not take into account taxpayers’ financial circumstances. Instead, they’re a percentage added to the price consumers pay for goods and services. Whether its groceries or a litre of fuel, indirect tax rates are the same for everyone. In Spain, value-added tax (VAT) is one of the most prominent indirect taxes. There are three VAT rates: A general rate of 21% is charged on the price of clothes, domestic appliances, sporting events and many other goods and services; a reduced rate of 10% on the price of hotel, restaurant, transport and similar services; and a further reduced rate of 4% on the price of food staples, medicine, books and other basic necessities.
Other ways to label taxes
We can label taxes in ways other than direct and indirect. While ”objective” taxes like VAT don’t consider taxpayers’ circumstances, “subjective” taxes like income tax take into account such aspects as number of children, age and marital status.
Another way to tell them apart is by how often we pay them. “Instant” taxes are one-off payments on financial transactions like receiving inheritance. “Periodic” taxes refer to ongoing situations like property ownership. The taxpayer will stop paying when they no longer own the asset. The same tax can fall into several categories. For instance, VAT can be indirect, objective and instant.
Though taxes are mainly to raise money to fund governments, they're also collected for other purposes. Some are created to discourage certain activities or to curb the consumption of certain goods. Some countries and regions impose taxes on polluting industries to promote sustainable production or on fossil fuels to help meet climate change objectives.
Taxes, fees and contributions
Taxes, fees and contributions are what taxpayers pay to fund the state. Fees are for services that governments offer, like issuing IDs and signing up for civil service exams. They're generally pre-set and cost the same for everyone.
Special levies are taxes paid to governments in return for benefits, such as public works to push up the value of property or to provide new facilities.
When we enter adulthood and embark on a professional career, taxes can be confusing. Check out this article (in Spanish) on Santander Consumer España’s blog, Tu Futuro Próximo (“Your near future”), to learn when to start filing a tax return.