Understanding Taxes …

Ok, granted it has taken me about 30 years to get around to it, but I am finally starting to understand taxation.

To most people this is obvious, but to me it has always been a little obscure.
Income Tax is applied using bands!
The Dutch system, presently, uses 4 bands of income tax.
Band 1 is 33%, Band 2 is 40 %, Band 3 is 42% and Band 4 is 52%. [Or there abouts]

Each band is only applied to the amount of income that sits within its bounds.
These boundaries are decided on a yearly basis by the tax authority. [The %ages also]

So if you earn less than the lower boundary for Band 2, you only pay 33% tax on the whole of your income.
If you earn, say, 1000 Euro more than the lower boundary for Band 2, you pay 33% tax on most of your income, but 40 % on the 1000 Euro. [and so on, the more you earn the more bands you have.]

One way of thinking about it is that in Band 1 a pay raise will increase your take home pay by 66% of the amount of raise, but in band 2 only 60%. If you are earning in the top band then a pay raise will only increase your take home pay by 48% or the amount of raise. [But if you are earning that much you should not be worried about it!]

Bands are pretty simple way of levying income tax. There are two other approaches.
The sliding scale: Which tends to be an algoritm that slides from 0 upto some maximum percentage, and is applied to the entire income.
And the famous flat tax: where by it does not matter if you earn millions, of just a few euros, you all pay the same percentage on the whole of your income. [The tax favoured by the present Tory leadership in the UK!]

2 thoughts on “Understanding Taxes …

  1. Michiel says:

    And of course all the rich fat bastards would prefer flat tax. Interestingly enough, more and more high government officials are becoming rich fat bastards > therefore…

    Like

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