Understanding Taxes, Money, and Economic Systems

Posted on Apr 3, 2025 in Economy

Taxes: An Overview

Taxes: A tax is a payment demanded by public administrations without direct compensation to the taxpayer.

Types of Taxes

  • Direct Tax: Levied directly on people and companies based on income or ownership of goods.
  • Indirect Tax: Levied on the consumption or use of goods.

Specific Tax Examples

  • IRPF (Personal Income Tax): Tax levied on individual income from work and capital.
  • IS (Corporate Tax): Paid by companies on profits, proportional to the benefit obtained.
  • IVA (VAT – Value Added Tax): Paid in most economic transactions between companies and individuals.
  • IE (Excise Tax): Tax levied on the manufacture, import, and consumption of specific goods.

Types of Money

Commodity Money

When scarce minerals, metals, or agricultural products are used as a means of exchange, they are considered commodity money. Gold and silver coins are examples. An advantage is that it can be used for purposes other than money.

Representative Money: Coins and Banknotes

An alternative to commodity money. Gold’s high density made large transactions difficult. Goldsmiths offered receipts as a solution.

Inconvertible Fiat Money

Refers to paper and virtual money that is intrinsically insignificant and not exchangeable or backed by a real commodity. It is money because the government declares it so, and we accept it. Examples include the U.S. dollar, euro, pound, and yen.

Creation of Bank Money and the Multiplier Effect

Commercial banks are financial institutions authorized to grant credits and accept deposits. They must maintain reserve requirements (minimum reserves) to cover withdrawals and ensure security.

Minimum reserves are assets banks possess:

  1. Cash in their banks.
  2. Funds deposited in the Central Bank.

Money is created when banks lend their excess reserves.

Long-Term External Financing

The main sources of long-term external financing are loans, leasing, and contributions from partners/shareholders.

Leasing

A contract granting a second party the right to exclusive possession and use of an asset for a specific period under specified conditions, in return for periodic payments.

Types of Leasing

  • Operational: The lessor (usually the manufacturer) covers repair and conservation costs. It has a high cost.
  • Financial: A leasing company is involved, and the lessee covers repairs and maintenance. The lessee pays rent for the contract’s life and cannot cancel it.

Debt Loans

  • Nominal Value: The value on the title, representing the loan amount.
  • Issue Value: The amount paid by the title acquirer.
  • Redemption Value: The amount paid to the title owner at amortization.

Issuance of New Shares or Capital Increases

Companies can raise funds by issuing new shares.

Difference Between Closed and Open Economies

Closed economies do not maintain relationships with the outside world and must self-sustain. Open economies have relationships with other countries, with foreign trade being relevant to their GDP.

It is difficult to find closed economies nowadays.