Taxes, Social Security, and Inflation Explained

Taxation Fundamentals

Direct vs. Indirect Taxes

Direct taxes are recorded directly on the income of an identifiable individual or entity. Income tax applies here, where the individual pays taxes based on their income and function.

Indirect taxes are collected by a person who ultimately supports the tax burden, and they are associated with consumption. The consumer pays indirectly for products because the tax (including VAT) is included in the final price.

Personal Income Tax (PIT)

Personal Income Tax (PIT) is a direct and progressive tax, calculated directly on the income of a person or company. Revenue sources recorded include:

• Wages: Income obtained by workers.
• Dividends: Profits distributed to corporate owners.
• Investment Income Yields: Interest obtained from bank deposits or investments.
• Rents: Charges collected by landlords for properties.
• Benefits: Income for self-employed workers.

The sum of all such income constitutes the gross tax base, which, after adjustments, results in the final taxable base.

Corporation Tax

Corporation Tax is a direct tax recorded directly on the income of a business. Tax regimes mentioned include:

• General Regime: 30% (previously 35% before 2008).
• SME Regime (Small and Medium Enterprises): 25%.

Value-Added Tax (VAT)

Value-Added Tax (VAT) is an excise tax paid by consumers, who see the price of goods and services increased by the tax rate. Example rates mentioned:

• General Rate (16%): Applies to most goods and services, including alcoholic beverages.
• Reduced Rate (7%): Applies to transport and certain foods/drinks.
• Super Reduced Rate (4%): Applies to essential staples (e.g., eggs, cheese, bread, fruit, medicines).

Social Security System

Social Security constitutes an important part of the state budget. Its revenues and expenditures are recorded separately from the central government and regional (autonomous) budgets. It is financed by contributions paid by workers and businesses.

Contribution details:

• Employed Workers: Contribute approximately 4.7% of their salary.
• Employers: Contribute approximately 23.6% of the worker's salary.
• Self-Employed Workers: Contribute based on a fixed salary, often around 26.5%, depending on various circumstances (worker age, contract type). Unemployed individuals are also listed/covered.

The purpose of these contributions includes:

• Pensions:
  • Contributory: For retirees who have contributed throughout their working life.
  • Non-Contributory: For those who have not met contribution requirements.
• Temporary Disability: Coverage for workers who are ill or have suffered an accident.

Understanding Inflation and Deflation

Inflation is the overall growth in prices. When prices go down, this is known as deflation.

Inflation is measured by the Consumer Price Index (CPI), which includes the price of goods and services typically purchased by families. The CPI does not include the price of investments.

Inflation data provides valuable information regarding a country's economic situation:

1. Inflation data helps explain key economic variables, such as wage growth, which is often agreed upon by workers and businesses in relation to inflation rates.
2. Inflation data serves monetary authorities, allowing them to assess their monetary policy and verify if the money supply put into circulation by the Central Bank is sufficient.