Essential Financial Concepts: Taxes, Profitability, and Valuation Metrics
Taxation Systems and Legal Frameworks
Main Direct Taxes
- Personal Income Tax (PIT): Levied on an individual’s wages, salaries, and other types of income.
- Personal Wealth Tax: A tax levied on the net fair market value of a taxpayer’s assets.
- Corporate Income Tax (CIT): Business income taxes applied to corporations, partnerships, small businesses, and self-employed individuals.
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Taxes on Gifts and Inheritances (Individuals Only):
- Inheritance Tax: Tax payable on any increase of wealth obtained by reason
International Tax Policy, Capital Mobility, and Competition
National Tax Strategy and Capital Allocation
The decision on the setting of tax rates assumes strategic connotations for each country. It must assess revenues from its own fiscal measures and consider the other country’s possible response to its own choices.
The introduction of the tax levy on capital gains, being a distorting instrument, can only lead to a loss of efficiency and, therefore, a decrease in welfare.
The tax is relevant only for its ability to influence the allocation of capital between
Read MoreBusiness Structures, Corporate Integration, and Banking Fundamentals
Sole Proprietorships (Sole Trades)
A sole proprietorship is a business that is owned by one person.
Sole traders are often successful because they can offer better consumer services. Many consumers prefer to meet the owner face-to-face, and a sole trader has the advantage of being more involved with local people.
Partnerships
In a partnership, two or more people own and share the costs and risks of a business.
There are two types of partnerships: limited partnership and unlimited partnership.
In a limited
Read MoreUnderstanding Fiscal Policy: Mechanisms, Taxes, and Economic Effects
Time Lags Affecting Fiscal Policy Implementation
Fiscal policy suffers from three main lags: recognition, implementation, and impact lags. It takes time to recognize economic problems, approve policies through political processes, and for the policy to affect output, employment, and inflation. These delays can significantly reduce the effectiveness of fiscal policy.
Factors Influencing the Multiplier Effect
Factors Decreasing the Multiplier Effect
Two primary factors reduce the multiplier effect:
- High
Common Currency Dynamics: Benefits, Risks, and Eurozone Criteria
The Dynamics of a Common Currency
Advantages of a Common Currency
- Elimination of Exchange Rate Risk: Leads to less uncertainty and potentially more Foreign Direct Investment (FDI).
- Removal of transaction costs.
- Increased stability and price transparency.
- Trade is boosted.
- Greater macroeconomic stability.
- A stronger currency against the rest (e.g., the US Dollar).
- Elimination of currency speculation.
Risks of a Common Currency
The primary risk is the loss of independence for central banks to fix interest rates
Read MoreFundamental Microeconomic Principles and Definitions
Economic Systems and Philosophies
Free Market Economy
A free market economy is a rationing system by which societies allocate resources to the production of goods and services using the price mechanism, with no government intervention. All economic decisions are based on the market forces of demand and supply. (Inspired by Adam Smith)
Command Economy
A command economy, also called a centrally planned economy, is a rationing system where the means of production are owned by the state. There is no private
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