What are taxes and what are they used for?

A large part of the economic resources used by public administrations for their own operation, as well as to cover the needs of the population, comes from the money that citizens and companies are obliged to pay in the form of taxes. We explain what they consist of, how they are used and what are some of the most important characteristics that you should know when identifying them.

Although sometimes we are not aware of it, taxes are a very important part of the financial transactions we carry out on a daily basis. When we pay for a purchase at the supermarket, buy a house, or refuel at the gas station, among others, we are contributing a portion of our money to the operation of the countries or regions where we carry out said economic activities.

For this reason, we can understand taxes as those amounts of money that a person or company is obliged to pay in favor of the Public Treasury to contribute to the financing of public spending and investment in the place where they live. As they are mandatory, taxpayers have to pay them according to the cases determined by the taxation of each country and without expecting any direct consideration, that is, they cannot demand anything in exchange for these taxes. What Is Personal Property Tax, And Why Do Businesses Need To Pay It?

Despite the fact that we might think that it is a fiscal instrument of the modern world, the reality is that civilizations as ancient as the Egyptians, Greeks, or Romans, already used the collection of taxes as a collection method when they needed to build towns, roads or aqueducts. At present, States also use tax money to pay for infrastructure projects, as well as to pay for the internal functioning of administrations or invest in public services such as health, education, or security.

On the other hand, when paying taxes there are some expressions that are frequent, but their meaning or importance is not always clear. Knowing them will help us to understand much better how they work and how these taxes are calculated.

  • Taxable event. It is the situation or economic operation that generates the obligation to pay a tax. In the case of the real estate tax (in Spain it is known as IBI) the taxable event is owning a property.
  • Passive subject. It is the person or company that is obligated to pay a tax.
  • Base tax. It refers to the economic amount on which a certain tax is calculated. As an example, if we sell an item worth 100 dollars and we must pay a tax of 21% then the tax base is 100 and the final value of the item is 121 dollars.
  • Type of lien. It is the proportion -expressed as a percentage: 4%, 10%, 21%...- that is applied to the tax base to know the value to be paid for a specific tax.
  • Tax rate. It is nothing more than the final value to pay for a tax.

Direct and indirect taxes, what are they?

The name, the value of the obligation to pay one or the other tax may change depending on the country where we are. Therefore, a simple way to better understand when we are paying taxes is to differentiate them by the way in which we pay them. They can be done directly or indirectly. 

  • direct tax. They are those that a person or company pays to generate income (wealth) or possesses a patrimony (assets). They are called direct because a fully identified taxpayer is taxed directly and whose calculation is made taking into account their actual ability to pay. Salaries, return on investments, the profits of a business, prizes, or the revaluation of assets, among others, are some examples of direct taxes. In countries like Spain, the tax that people pay for obtaining economic benefits is known as IRPF (Personal Income Tax) and the one that companies pay for their profits is called IS (Corporate Tax), while In other countries such as Mexico, both individuals, and companies are taxed through ISR (Income Tax).
  • Indirect taxes. In this case, the economic capacity of each taxpayer is not taken into account, but an additional percentage is imposed that all consumers must pay at the time of purchasing the products and services. In other words, consumption is taxed in a general and equal way for everyone. It is for this reason that in the supermarket all people pay the same percentage of taxes on the purchase or that a liter of fuel costs the same to all car owners. One of the most widespread indirect taxes in Spain, for example, is VAT (Value Added Tax), which can increase the price of what we consume by three different percentages. The first of these is the general rate, which is taxed by default at 21% on most goods and services on the market (clothing, household appliances, etc.).sports events…); the second is the reduced rate, in which 10% is applied to a list that includes hotels, restaurants, transportation, among others; while the third type is the super-reduced one, which taxes 4% on those considered essential goods and services, such as essential food, medicines or books.