Understanding Income Tax, Public Expenditure, and Fiscal Policy

Posted on Feb 8, 2025 in Economy

Understanding Key Economic Concepts

Income Tax

Income tax: Taxation (mandatory payments required of families and businesses in order to meet public expenditure).

Types of Taxes:

  1. Fees (Tasas): Charges levied by the state for the provision of services by the public administration.
  2. Contributions: Taxes collected by the state from citizens for a work or service that provides a specific benefit.
  3. Tax (Impuesto): A charge that does not correspond to a specific payment for a service. Examples include:
  • Income tax (direct and progressive)
  • Corporate tax (direct and proportional)
  • Property tax (direct and proportional)
  • Value Added Tax (VAT) (indirect and proportional)
  • Special taxes (indirect)

Public Expenditure

Public Expenditure: A set of resources that the state allocates to meet public needs.

Types of Public Expenditure:

  • Personnel Expenditure
  • Expenditure on Goods and Services
  • Transfer Payments
  • Financial Expenditure
  • Investment Expenditure

State Functions

State Functions: Legislative function, enhancing economic efficiency when the market fails to allocate resources properly, redistributing income, and stabilizing the economy.

Fiscal Policy

Fiscal Policy: A set of decisions taken by the government regarding tax and public spending levels to influence aggregate demand, production, employment, and price levels.

Types of Fiscal Policy:

  • Expansionary Fiscal Policy: Objective: To increase aggregate demand to increase production and employment.
  • Contractionary Fiscal Policy: Objective: To curb the expansion of aggregate demand or spending in the economy, reduce inflation, and reduce the public deficit. This involves the government increasing taxes and reducing spending.

Monetary Policy

Monetary Policy: This influences the economy by changing the amount of money and the interest rate.

Types of Monetary Policy:

  • Expansionary Monetary Policy: Objective: To increase aggregate demand to stimulate economic growth and job creation by raising prices and decreasing the interest rate or increasing the money supply.
  • Contractionary Monetary Policy: Objective: To reduce the inflation rate by increasing or decreasing the money supply, which lowers the level of prices.

Money

Money: A medium of exchange and payment of general acceptance.

Functions of Money:

  • Medium of exchange
  • Unit of account
  • Store of value

Classes of Money:

  • Legal money
  • Bank money (deposits and current accounts)
  • Quasi-money (all financial assets that serve the function of store of value and are convertible to money but cannot be used as a means of payment)

Inflation

Inflation: Continued growth and general increase in the price of goods and services in an economy.

Effects of Inflation:

  1. Loss of purchasing power of money (affects different economic actors unequally, leading to a redistribution of income and national wealth).
  2. Uncertainty (inflation distorts prices, reducing their ability to convey information).
  3. Loss of competitiveness of domestic production abroad.
  4. Unemployment (caused by the other three effects).

Financial Instruments

Bonds (Obligaciones):

Fixed income (interest). Purchasing a bond means making a loan to the company. The bondholder is entitled to a refund of the borrowed capital amount previously established. Bonds are a source of external funding for the company.

Stocks (Actions):

Equities (dividend). Purchasing a stock makes you a part owner of the company. The shareholder is entitled to a share in the assets of the company when it is settled. Stocks are a source of self-financing.