The welfare state and taxes

Explain what the welfare state is and what services taxes fund in Spain. Where does the money for a state school or a public hospital come from?

Make a list of five things you use or benefit from that are paid for with taxes, even if you do not notice (the tarmacked street, your school, the health centre, the fire brigade, the sports centre). Explain why taxes are said to be "the price of shared services".

What is Social Security and what does it fund in Spain (pensions, part of healthcare, unemployment benefits)? Explain who contributes (employer and worker) and why it is described as a compulsory collective insurance.

Distinguish between direct and indirect taxes and classify the following: VAT, IRPF (personal income tax), corporation tax, and fuel duty. Who pays them and what are they levied on?

Taxes can levy income, consumption or wealth. Classify the following: VAT, IRPF (personal income tax), the property tax (IBI) and inheritance tax. Explain what each one is levied on.

In Spain, not everything has the same VAT: there is a standard rate ($21\ \%$), a reduced rate and a super-reduced rate. Explain why bread, medicines or books have lower rates than a mobile phone or a television: what fiscal policy criterion lies behind it?

A bicycle costs $400\ \text{€}$ excluding VAT and the standard rate of $21\ \%$ is applied.

1. a) Calculate the VAT and the final price.
2. b) Explain why VAT is considered an indirect tax.

What is the tax rate? Calculate how much is paid with a rate of $10\ \%$ on a taxable base of $1.000\ \text{€}$ and with a rate of $21\ \%$ on the same base. What is the difference between the taxable base and the tax due?

One country has a single tax rate of $20\ \%$ on income; another uses tax brackets: $10\ \%$ up to $10.000\ \text{€}$ and $30\ \%$ above that amount.

1. a) Calculate how much a person earning $10.000\ \text{€}$ and another earning $30.000\ \text{€}$ pay under each system.
2. b) Which system is progressive and which is proportional? Explain the difference.

An income of $15.000\ \text{€}$ is taxed as follows: $0\ \%$ on the first $10.000\ \text{€}$ and $15\ \%$ on whatever exceeds $10.000\ \text{€}$.

1. a) Calculate the total tax due.
2. b) Calculate the effective average rate and explain why it is lower than the $15\ \%$ (marginal rate) paid on the last bracket.

The figure compares two income taxes: a flat-rate tax and a progressive bracket tax. On the horizontal axis, annual income; on the vertical axis, the effective rate paid.

1. a) Read what effective rate an annual income of $40.000\ \text{€}$ pays under each system.
2. b) Explain which curve corresponds to each system and what it means that one increases while the other does not.

The tax on sugary drinks is paid at source by the distributor, but the price on the shelf rises by almost the whole tax.

1. a) Explain how a tax is passed on to the price and who bears it in the end.
2. b) What does it depend on whether the shop can pass it on in full or has to absorb part of it (think about the elasticity of demand)?
3. c) Analyse who bears this tax more, in proportion to their income: is it progressive or regressive? Justify your answer.

The government is considering raising a tax and is deciding between VAT on cinema tickets and VAT on sugary drinks.

1. a) Analyse each option using three criteria: expected revenue (think about the elasticity of demand), health impact, and equity (who is affected most).
2. b) Decide on and defend your proposal as if you were the tax adviser.

Distinguish between tax avoidance (exploiting legal loopholes to pay less) and tax evasion (hiding income, which is a crime). Give an example of each and explain why some people's fraud ends up being paid for by the rest of the taxpayers (fewer services or higher taxes for everyone).

In a parliamentary debate on taxation, one member of parliament states: "If we raise the top marginal income tax rate from $45\ \%$ to $60\ \%$, revenue will fall because high earners will stop making an effort or leave the country." Another MP replies: "On the contrary, to maintain their net standard of living after tax, professionals will have to work even more hours, so we will collect more."

1. a) Identify the two opposing microeconomic effects (substitution effect and income effect) underlying each MP's argument and explain how each affects the labor supply.
2. b) Use the logic of the Laffer curve to predict under what empirical conditions the first MP would be right and under what conditions the second would be right.
3. c) Imagine you are advising the Ministry of Finance: what empirical variables or indicators (labor supply elasticity, international tax mobility, avoidance opportunities) would you ask to analyze before setting that $60\ \%$ rate, comparing it to a moderate rate of $20\ \%$?

A Spanish subsidiary of a tech multinational has a turnover of $100$ million euros in Spain. However, its pre-tax accounting profit in our country is only $2$ million euros, after deducting $85$ million euros paid to its parent subsidiary in Ireland for "royalties for the use of software and patents". When applying the official corporate tax rate of $25\ \%$, the company pays $0,5$ million euros in Spain (an effective rate of only $0,5\ \%$ on its gross turnover).

1. a) Interpret the case: explain what tax engineering mechanism (transfer pricing and base erosion) the company is using to shift profits to low-tax jurisdictions.
2. b) The OECD has promoted an international agreement to set a global effective minimum tax rate of $15\ \%$ (Pillar 2). Predict how this measure would affect the multinational's strategy and whether it would completely solve the loss of tax revenue in Spain.
3. c) Justify why it is so difficult in practice to get all countries to implement this minimum rate, using the concept of tax competition and the incentive for certain States to act as "free riders".