Tax Law Flashcards
Definition of Tax
A compulsory contribution in monetary (or other) form by individuals, organizations, or entities, received by the government for public purposes (i.e. unrequited).
User Charges
Payments for access to a specific public good or service, e.g. connection to the electricity grid.
3 Goals of Taxation
Revenue, Redistribution, and Regulation.
Taxpayer
A person or entity legally obligated to pay taxes to a government based on income, purchases, or other taxable activities.
Service Fees
Payments made for a specific service performed by the government. These are quid pro quo (not unrequited). They’re roughly proportional to the value of the underlying service.
Social Security Charges
Mandatory payments made by individuals and/or employers to the government’s social security system, e.g. pensions, unemployment benefits, etc.
Income
Any financial gain or revenue earned by an individual or entity from sources such as business operations, investments, or employment, which may be subject to taxation under different jurisdictions.
Accretion Approach
A person’s annual income is the value of what she could consume in that year while keeping the wealth constant. It equals to consumption + the change in wealth.
Source Approach
A certain item is income only when it derives from a specific source, most likely an economic one.
Wealth
The total value of assets owned by a legal or natural person.
Global Tax System
The item of income is included in the taxable income unless specifically excluded. All that matters is the accumulation of wealth.
Schedular Tax System
An item of income is not taxable unless specifically included in a specific schedule.
Tax Base
The amount of money on which tax is imposed. It is determined by deducting deductible expenses and exemptions from the “Gross Taxable Income’.
Gross Income
Includes employment, businesses, and investment income. It’s subject to specific inclusion rules to prevent restrictive judicial interpretations.
Exempt Income
Certain types of income are excluded from taxation due to social or economic policy objectives, such as retirement contributions, diplomatic earnings, and government allowances.
Business Income
Requires a clear definition between business profits and personal income. Some tax systems therefore distinguish between corporate trading activities and professional service income.
Investment Income
Covers interest, dividends, rental earnings, and capital gains.
Exemptions
A portion of the income is excluded from taxation.
Deductions
Expenses incurred to generate income may be deducted, hence reducing the taxable amount.
Flat Tax
All individuals or businesses pay the same fixed percentage of their income, regardless of earnings, simplifying tax compliance.
Progressive Tax
The tax rate increases as income rises, meaning higher earners pay a larger percentage of their income than lower earners.
Marginal Tax Rate
The rate at which the next euro of taxable income is taxed. It represents the tax rate for the highest income bracket that a taxpayer’s income falls into.
Effective/Average Tax Rate
The total tax paid as a percentage of total income, reflects the overall tax burden.
Tax Credit
A direct reduction in the amount of tax owed to the government. Tax credits lower the actual tax liability.
Tax Liability
The total amount of tax an individual or entity is legally required to pay within a given period.
Family Taxation
The taxation of a family unit instead of the individual. The income of the respective people is added up and then taxed as a whole, usually with a lower rate than for individuals.
Loss
A financial shortfall that occurs when expenses exceeded income or revenue (e.g. due to investment).
Loss Carryover
Allows individuals/businesses to apply a net loss to past or future tax years to reduce taxable income.
Employment
A work arrangement where an individual performs services under an employer’s control under contract in exchange for compensation.
Self-Employment
A work arrangement in which an individual operates their own business, trade, or profession rather than being employed by someone.
Business
An organized economic activity involving the production, sale, or exchange of goods or services for profit. Its main intention is therefore to generate profit.
PAYE (Pay-As-You-Earn)
A tax system where income tax is deducted from wages or salaries before payment is made to the employee before employees receive their pay, hence on a monthly basis.
Financing
The process of obtaining funds to support business activities, investments, or expenditures through debt, equity, or other financial instruments.
Equity Financing
A form of financing where investors provide capital in exchange for ownership shares and potential dividends, without an obligation of repayment.
Debt Financing
A financing method where a company borrows money with a legal obligation to repay the principal amount along with interest.
Economic Double Taxation
Arises when profits are subject to taxation twice, first at the corporate level through CIT, and subsequently when distributed to shareholders as income through PIT.
Dividend
A distribution of company’s earnings to its shareholders, typically in cash or additional shares, as a return on investment.
Interest
The cost of borrowing money, usually expressed as a percentage of the principal, paid by the borrower to the lender over time.
Tax Accounting and Timing
Cash: Income is recognized when received, expenses when paid.
Accrual: Income is recognized when earned, and expenses when incurred.
