Understanding Income Tax and Financial Systems

Posted on Feb 20, 2025 in Business Administration and Management (BAM)

Income Tax

Income tax is a direct tax levied on income obtained from citizens. Income tax brings the state more than a third of what is collected. It seeks the implementation of the principles of economic progressivity and fairness.

Statements of Income Tax

  1. To calculate income tax, we must add all income earned by the taxpayer during the year.
  2. From the proceeds, we must subtract the costs necessary for their production, such as social security contributions. There is also a tax-free allowance or amount needed to live, which is subtracted to find the taxable base.
  3. Reductions apply to the taxable base. These are set according to circumstances that are meant to be promoted, such as job performance or for each child under 3 years old.
  4. Once reductions are applied, a percentage is applied to the resulting amount. This percentage varies according to a progressive rate; the higher the amount, the greater the percentage, and thus the full payment is obtained.
  5. From this full quota, deductions are subtracted. The resulting sum or net amount is what would have to be paid to the IRS.
  6. As an amount is withheld from payroll throughout the year on account of tax, there are two situations:
    • If what we have paid in advance is less than what we have to pay, the statement will be positive, and we must pay the difference.
    • If instead we have paid more than the amount due, the statement is negative, and Finance must return the difference.

Financial System

Financial intermediaries operating in the markets form the financial system. Their function is to connect and coordinate the funding offered to the applicant.

Bank Financial Intermediaries

Banks, savings banks, and cooperative banks are the entities that make up the banking system in Spain and, therefore, constitute bank financial intermediaries. The differences between these three types of entities lie primarily in their legal form:

  • Banks are private companies that make profits for their owners.
  • Savings banks are non-profit entities that allocate their profits to charitable and social causes.
  • Credit unions belong to their depositor partners, who are the beneficiaries of their financial services.

With respect to services offered, the typical activities of banking intermediaries are very similar: the collection of deposits and lending.

Non-Bank Financial Intermediaries

  • Corporate and Investment Funds: Sell shares to the public and use the proceeds to buy a selection or portfolio of different types of stocks and bonds.
  • Pension Funds: Raise money contributed by active workers regularly and invest it for profit.
  • Insurance Companies: Provide financial coverage to customers for all types of risks. Income is derived from contributions paid by their customers.
  • Leasing Entities: Finance companies that need equipment goods.
  • Factoring Entities: Collect outstanding invoices or credits that companies have on third parties in exchange for payment.
  • Venture Capital: Provide temporary capital to companies belonging to dynamic sectors of the economy that are expected to have above-average growth.

Trade Deficit

A trade deficit occurs when the value of a country’s imported goods is higher than its exports.