Understanding Taxes, Special Contributions, and Rates
ITEM 23: Understanding Taxes
What are Taxes?
Taxes are monetary payments required by the State, exercising its power under law, to cover the costs of fulfilling its purposes.
Classification of Taxes
Taxes
Taxes are charges levied by the state, under its power to rule, on situations deemed by law as taxable events. These events are unrelated to any specific state activity.
The institutional objective of taxes is to provide revenue to the State to meet public expenditures and those derived from its operations.
Taxes are classified as:
- Direct Taxes: These taxes cannot be transferred and are directly tied to the taxpayer and the taxable object.
- Real Direct Taxes: These taxes are based on the quality and quantity of taxable goods, without considering the taxpayer’s circumstances.
- Personal Direct Taxes: These taxes consider the taxpayer’s personal circumstances, such as total tax capacity and family burden.
- Indirect Taxes: These taxes are paid by the importer and establish a legal relationship between the importer and the Treasury, but are ultimately borne by the consumer.
- Proportional Indirect Taxes: These taxes have a fixed rate applied to the amount and value of taxable wealth. For example, Value Added Tax (VAT).
- Progressive Indirect Taxes: These taxes have a rate that increases as the amount taxed increases. For example, Income Tax (ISLR).
Special Contributions
Special contributions are taxes levied on the acquisition of a benefit or an increase in property value resulting from public works or the establishment or expansion of public services.
They can be classified according to the taxable event:
- For Improvement: This is a compulsory contribution, motivated by obtaining a benefit for the taxpayer, which originates from the execution of public works. This contribution is legitimized by the increased value of the taxpayer’s assets as a direct result of the completion of that work. An example is the tax charged to property owners for the increased value of their property due to street paving.
- Social Security: These contributions are charged to employers and workers, with the proceeds used to finance welfare services and social assistance.
Difference Between Taxes and Rates
While there is no substantial difference between taxes and rates as they are legally related, the criterion for differentiation lies in the nature of the relationship between the public body and the service user or person benefiting from the activity.
If the relationship is contractual, it falls under private law (Tax). If it is a legal obligation, it is a Rate. Rates are linked to government activity, while taxes are not.
Difference Between Special Contributions, Taxes, and Rates
Special contributions differ from other taxes because they require a profit-producing activity, while taxes do not correlate to any specific state activity.
Special contributions and rates both require specific state activity. However, while rates are only required for individual services, even without a direct benefit, a benefit is essential for a special contribution.
Rates
Rates are tributes whose obligation is legally tied to specific state activities directly related to the taxpayer.