Public spending and taxes

Make a list of six things paid for with public money that you have used this month (secondary school, the local health clinic, street lighting, the library, the park, the police) and explain what would happen if each was paid for directly per user: who could afford secondary school or an operation?

The State budget works like that of a giant house: on one side the revenue (taxes and contributions), on the other the spending (healthcare, education, pensions).

1. a) Explain what happens if it spends more than it takes in (a deficit: it has to borrow) and if it takes in more than it spends (a surplus).
2. b) Compare it with your own monthly budget: what do you do when your expenses exceed your pocket money?

Not everything paid to the State is a tax: fees are paid for a specific service you use, like the municipal swimming pool, rubbish collection or the driving licence exam.

1. a) Explain the difference between a tax and a fee with those examples.
2. b) Say which way of funding the public library seems fairer to you: with a fee only for those who use it or with a tax we all pay, and give reasons for your answer.

Direct taxes tax what you earn or own; indirect taxes tax what you spend. Classify these taxes as direct or indirect: (a) income tax (IRPF) deducted from a payslip; (b) VAT on a video game; (c) Corporation Tax, paid by a company on its profits; (d) VAT on bread; (e) road tax for a car. Then explain the difference in your own words.

When you buy a pair of trainers for $60\ \text{€}$ with VAT included, the shop does not keep that tax: it holds on to it and pays it to the tax authorities every quarter.

1. a) Explain who really pays VAT (the final buyer) and who acts as the collector (the shop).
2. b) Argue why the State uses shops to collect it instead of asking each of us for the VAT at the end of the year.

A games console costs $350\ \text{€}$ excluding VAT, and the standard rate for this tax is $21\ \%$.

1. a) Calculate how many euros of VAT are paid and the final price of the console.
2. b) In another shop, the same console displays $423,50\ \text{€}$ with VAT already included: calculate what portion of that price is VAT.

An imaginary tax operates in bands: $10\ \%$ is paid on the first $1.000\ \text{€}$ of monthly salary, and $20\ \%$ on anything above $1.000\ \text{€}$. Ana earns $900\ \text{€}$ per month and Berto, $2.000\ \text{€}$.

1. a) Calculate how much each person pays per month.
2. b) Calculate what percentage of their total salary each person pays and explain why this tax is called progressive.
3. c) Compare this with a flat-rate (proportional) tax of $15\ \%$ for everyone: who would win and who would lose?

In the country of Tributania, income tax has two brackets: the first $12.000\ \text{€}$ a year is taxed at $10\ \%$ and anything above that, at $25\ \%$. Nora earns $10.000\ \text{€}$ a year and Pablo, $20.000\ \text{€}$.

1. a) Calculate how much each one pays (careful: Pablo pays $10\ \%$ on his first $12.000\ \text{€}$ and $25\ \%$ only on the rest).
2. b) Calculate the average rate each one pays on their total salary.
3. c) Explain why the system is progressive even though Pablo doesn't pay $25\ \%$ on his whole salary.

In Equilandia there live three families: A earns $1.000\ \text{€}$ a month, B, $2.000\ \text{€}$, and C, $5.000\ \text{€}$. Two systems are compared: (1) a proportional tax of $20\ \%$ for everyone; (2) a progressive tax: $10\ \%$ up to $1.500\ \text{€}$ and $30\ \%$ above that.

1. a) Calculate how much each family pays in each system.
2. b) Calculate each family's average rate in the progressive system.
3. c) Analyse which system redistributes more and defend which you would choose for a country with a lot of inequality, with an economic argument and one of justice.

Besides taxes, workers and companies pay Social Security contributions.

1. a) Explain what you get in exchange for contributing: public healthcare, unemployment benefit, the future retirement pension and sick or maternity leave.
2. b) Give an example of each benefit in a family you know, real or made up.

Here is the simplified payslip for Teo's mother: gross salary $1.400\ \text{€}$, Social Security contributions $95\ \text{€}$, income tax (IRPF) withholding $140\ \text{€}$.

1. a) Calculate the net salary, the amount that actually enters the bank account.
2. b) Explain what the contributions are used for (unemployment, pensions, healthcare) and what the income tax withholding pays for.
3. c) Her work colleague earns the same gross salary but has $180\ \text{€}$ withheld for income tax: give a possible explanation (family situation, number of children) and calculate the difference in net salary between them.

Samira's first payslip: gross annual salary of $15.400\ \text{€}$ in $14$ payments, with $6,35\ \%$ in Social Security contributions and an $8\ \%$ income tax withholding.

1. a) Calculate the monthly gross.
2. b) Calculate the approximate monthly deductions and the net amount that will reach her bank.
3. c) Explain the difference between gross and net, and why, when negotiating a salary, you must always ask about the annual gross.