Why taxes exist and how they reach you

Tara, 17, has never had a job. She buys a jacket for €122 and thinks, “At least I don’t pay taxes yet.” Then she reads the receipt: “VAT 22%”. What did she pay?

What taxes pay for

A tax is a compulsory payment to the state that is not the price of a particular service. Taxes pay for things we use together: roads, schools, public health care, police and, in many countries, pensions. In Slovenia, social contributions for pension and health insurance are separate from income tax, but on a payslip they feel similar.

Direct and indirect taxes

• A direct tax is charged on you, based on what you earn or own: income tax, tax on interest, dividends and capital gains, and property tax. You see it on a payslip or a tax decision.
• An indirect tax is hidden inside a price. The seller collects it and passes it on to the state. The main one is VAT, value-added tax (DDV in Slovenia). Others are excise duties on fuel, alcohol and tobacco.

VAT is a percentage of the price before tax. That is why the share you pay is smaller than the headline rate.

Everyone pays VAT, whatever their income. That makes it regressive relative to income: it takes a bigger share of a small income. A €1,220 fridge carries €220 of VAT for a pensioner earning €900 a month (24% of her income) and for a manager earning €6,000 (under 4%).

Planning and evasion

• Tax avoidance means reducing tax legally, by using allowances, tax-advantaged accounts or waiting for a lower rate. It is planning within the rules.
• Tax evasion means illegally not paying tax that is owed, for example by hiding income or inventing expenses. It is a crime with fines, interest and sometimes prison.

“The account is abroad” does not hide anything. More than 100 countries automatically exchange information about foreign residents’ financial accounts with their home tax offices.