Public Finance Study

Tax Structures and Personal Income Tax

• The Personal Income Tax (PIT) is a tax levied on individuals' income, including wages, salaries, profits, interest, and rents.
• PIT is a progressive tax, meaning that the tax rate increases as the taxpayer's income rises.

Scenario 1: Progressive Tax

• Income: $40,000, $120,000
• Tax rates: 7%, 8%, 14%
• Average tax rate: varies with income

Scenario 2: Proportional Tax

• Income: $35,000, $40,000, $120,000
• Tax rate: 9% (constant)
• Average tax rate: 9%

Scenario 3: Regressive Tax

• Income: $35,000, $40,000, $120,000
• Tax rates: 12%, 11%, 9%
• Average tax rate: varies with income

Overview of PIT

• PIT is one of the main sources of government revenue in many countries.
• Its implementation and effectiveness vary across jurisdictions.

Economic and Policy Drivers of PIT Revenue

• Economic variables: GDP per capita, agriculture as a share of GDP, self-employment as a share of total employment, public sector wage bill as a share of GDP, and annual inflation.
• Policy changes: can enhance or dampen the growth of PIT revenue.

Impact on Income Distribution

• PIT can have significant implications for income distribution.
• Other taxes, such as consumption taxes and corporate income taxes, can also affect income distribution.

Corporate Investment Decisions

• PIT can impact corporate investment decisions by reducing consumption and increasing labor costs.
• This can potentially discourage firms from investing.

Principles of Taxation

• Families with equal income should be taxed equally, regardless of the number of income earners.
• PIT should not discourage women from working.
• PIT should treat different "community styles of life" equally.

Joint Tax Returns and Tax Arbitrage

• In the past, joint tax returns were mandatory for married couples, but this was deemed unconstitutional.
• Individual tax returns permit tax arbitrage, which can reduce the progressivity of the tax.
• Germany introduced the "splitting" system to avoid tax arbitrage and treat married couples fairly.

Different Tax Scales to Different Types of Families

• The United States applies different tax scales to different types of units of taxation.
• The basis of progressivity is in the concept of decreasing utility of income.

Public Finance and Taxation

• Public finance is the study of public sector economics.
• It involves the use of tax and expenditure measures to address policy problems.
• Taxation is necessary due to market failures, such as allocation of resources, distribution of income, and stabilization of the economy.

Need for a Public Sector

• Government intervention is necessary due to market failures.
• Allocation function: market prices reflect real costs, and there are no externalities.
• Public goods: non-rivalry in consumption, and it's impossible to exclude anyone from enjoying the benefits.
• Merit goods: goods with positive externalities, such as education and basic health attention.

Personal Income Tax Characteristics

• Direct: levied on a direct manifestation of the ability to pay.
• Personal: adapted to the economic capacity of the subject.
• Progressive: (not always) the ability to pay of the individual increases more than proportionally with income.
• Irrespective of origin: regardless of where the income originates.### The Concept of Income Distribution and Taxation
• The concept of equal distribution of income as an objective of economic policy emerged in the late 19th century and gained strength in the mid-20th century.
• The theory of utility states that welfare is not only a result of high national production and income but also of an equal distribution of income among the population.
• The government's purpose is not to raise GDP but to raise the utility obtained by society, which depends strongly on how well income is distributed.

The Role of Government in Income Distribution

• The government intervenes to adjust the distribution of income and wealth from that given by the market on its own.
• The fair or just distribution of income cannot be achieved under the market mechanism.
• The distribution of income among individuals depends on their factor supplies and the prices they fetch in the market.
• Earning abilities differ, and so does factor endowment, which may or may not be in line with what society considers fair and just.

Coercive Payments and Taxes

• Coercive payments are always the result of a law (e.g., Article 31.3 of the Spanish Constitution).
• Coercive payments can be:
  • Material payments established as a penalty, sanction, or fine.
  • Personal services, such as military service, to attend a public need.
  • Borrowing to the State in certain circumstances (e.g., patriotic mandatory bonds).
  • Letting or transmission of a private property required to attend a public interest or social utility goal.
  • Taxes, which are coercive material payments demanded considering the ability to pay of the payer.

Tributos in Spain

• Tributos are coercive payments established by law, different from sanctions.
• There are three types of Tributos:
  • Impuestos (tax): coercive payments established by law without compensation to the payer.
  • Tasa (a sort of administrative fee): coercive payment for an individual service rendered or received.
  • Contribución Especial: a Tributo imposed on special beneficiaries of a public work or service.

What is Taxation?

• Taxation is the study of how the government imposes and collects taxes from the income and wealth of individuals and corporations to finance its social and regulatory activities.
• The study of taxation includes tax policy, law, and administration.
• A tax is a compulsory and mandatory contribution to the government from its subjects.
• Hugh Dalton defined a tax as "a compulsory contribution imposed by a public authority, irrespective of the exact amount of services rendered to the taxpayer in return."

Roberto's Income

• Roberto's income includes:
  • Monetary salary as General Manager (€90,000).
  • Consumption (€72,000) and increase in wealth (€18,000).
  • Benefits:
    • Exclusive use of the company's car (€2,000).
    • Rent of the apartment owned by the company (€15,000).
    • Free plane tickets (€8,535).
    • Credit card expenses (€13,450).
  • Gifts:
    • IPhones (€2,400).
    • Discounts on telephone consumption invoice (€2,000).
    • Free tickets to the Opera and football matches (€520 and €367, respectively).
    • Silver cutlery, Mac Book, and Valentino towels (€8,000, €700, and €159, respectively).
  • Utility obtained from his own empty house (€24,000).

Tax Systems

• Tax systems serve multiple purposes beyond generating revenue, including:
  • Economic stability
  • Economic growth
  • Fairness and equity
• Components of tax systems include:
  • Revenue collection agencies
  • Types of taxes (income tax, corporate tax, value-added tax (VAT), and payroll tax)
  • Deductions and subsidies

Functions of Tax Systems

• Economic stability: reducing inequality and smoothing out fluctuations in income
• Economic growth: shaping the economy's direction and encouraging investment
• Fairness and equity: ensuring a fair distribution of the tax burden and promoting socially desirable outcomes