Tax Systems & Welfare State Models Explained
Posted on Jun 24, 2025 in Economy
Understanding Tax Systems and Welfare State Models
Key Tax Definitions
- Value Added Tax (VAT): A tax levied on the price of goods or services paid by the consumer.
- Income Tax: A tax levied on the income received by individuals or businesses, such as salaries.
- Company Tax: A tax levied on the profits of a company.
- Social Security Contribution: A tax paid by employees and employers to fund social benefits.
Tax System Breakdown: Who Pays and Who Benefits?
| Aspect | Value Added Tax | Income Tax | Company Tax | Social Security Contribution |
|---|
| Who Pays? | Every consumer | Individuals who receive salaries | Companies that generate profits | Employees and Employers |
| Recipient of Tax | Government | Government | Government | Government |
| Benefiting Institutions | Government and Citizens | Government and Citizens | Government and Citizens | Government and Citizens |
| Services & Support Received | - Education
- Healthcare
- Defense
- Police
- Cultural events
- (and more)
| - Education
- Healthcare
- Defense
- Police
- Cultural events
- (and more)
| - Education
- Healthcare
- Defense
- Police
- Cultural events
- (and more)
| - Sick pay
- Unemployment benefit
- Widow’s pension
- Maternity/Paternity pay
- Retirement pension
|
Glossary of Terms
- Employee: Langilea (Basque for ‘worker’)
- Employer: Lana ematen duena (Basque for ‘one who gives work’)
The Welfare State: Definition and Benefits
Understanding the Welfare Concept
- Welfare implies that people have a minimum level of education, health, and financial security. To maintain this well-being, various institutions provide social and economic support, especially in challenging circumstances.
Key Welfare State Benefits
- Disability pension
- Paternity/Maternity pay
- Retirement pension
- Sick pay
- Unemployment benefit
- Widow’s pension
The Social Contract of the Welfare State
- The welfare state functions as a contract between the state (or government) and its citizens. Citizens agree to pay taxes to maintain the services managed by the government.
Comparing Global Welfare State Models
| Aspect | Social Democratic Model | Liberal State Model | Communist State Model |
|---|
| Tax Policy | Citizens pay very high taxes. | Citizens pay very few taxes. | Citizens do not pay any taxes because everyone works for the state. |
| Citizen Protection | All citizens are offered benefits and services in education, healthcare, and employment. Even high-income citizens utilize these services. | There is no state-managed healthcare system or social security. Citizens must contract private services, and only those in real need receive protection. | The state provides all citizens with basic services (food, education, healthcare). |
| State’s Participation | The state plays a major role in the economy, stipulating the minimum wage, maximum working hours, and more. | The state does not intervene in the economy; there is no minimum wage, no protection of workers’ rights, and services are primarily private. | State control is total. All the country’s means of production and resources are controlled and managed by the state. |
| Involvement of Civil Society | Even though there are some social organizations, the needs of citizens are mostly covered by public institutions. | As the state does not protect its citizens, there are many social initiatives to help people. | Civil organizations are not permitted or often face obstacles. |
| Example | Sweden | USA | Cuba |
