A tax is a fee paid to the government to cover the public expenditure required to run a welfare system. In other words, it is the way countries obtain financing and the resources needed to perform functions such as building and maintaining infrastructure, paying pensions and public servant salaries and operating education and public health systems.

Most taxes are collected via the direct taxation of all individuals and legal entities residing in Spain that receive some kind of income. Indirect taxes, in contrast, are paid by all citizens, irrespective of their financial capacity, status or age. These two taxes are explained in greater detail below to help you understand them better.

Direct taxes are charged directly on the income of both individuals and legal entities. The amount to be paid by each is calculated based on their personal characteristics. In Spain, there are nine types of direct taxes, the most important of which is the Personal Income Tax (IRPF). Parameters such as annual income, estate and family status are applied in order to calculate how much money a taxpayer must contribute as a direct tax.

Indirect taxes differ from direct taxes in that they are charged on a taxpayer's consumption rather than their income. They are called indirect taxes as they do not directly accrue as a result of a person's income. Instead, they are applied to production and sales costs and companies pass them on to consumers via the prices they charge. In other words, indirect taxes are set by authorities on the production, sale, purchase or use of the goods and services that producers charge to production expenses and pass on via the final prices they charge.

The most popular example of an indirect tax is the Value Added Tax (VAT). This is charged on sales, such that consumption is the object of the levy. Authorities in the Canary Islands employ the General Indirect Canary Islands Tax instead of VAT in order to offset the mandatory expense incurred in transporting goods to the region.

Depending on the rate applied to taxable income, direct taxes can be regressive, proportional, or progressive. In regressive taxes, the tax rate decreases as taxable income increases. Proportional taxes have a fixed rate that does not vary depending on income, while for progressive taxes, the increase in tax rates is proportional to taxable income. In other words, taxpayers who earn more money pay more to the Government as tax, as is the case with Personal Income Tax.

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