Taxable income is a term from tax law that describes the result of a formula that is sometimes quite complicated. This concept of income is based on the political will that “strong shoulders should do a lot” and weak shoulders should do less to maintain the state by paying taxes. The tax payment should be based on performance.
The “calculation formula” or the basis for calculating the taxable income is therefore also one of the most effective acts of the state in order to implement the goals of justice and the principle of the welfare state.
In Germany, the following calculation bases or basic principles apply to taxable income:
As a rule, the subsistence level remains tax-free. The gross income (regardless of which of the income types) is reduced by tax exemptions. In the end, the taxpayer only has to pay taxes on part of his income.
- The taxable income usually also takes into account the costs associated with the respective income generation. In this way, employees can reduce travel costs to the workplace and other costs as income-related costs that reduce taxable income.
- The taxable income is increasingly taking into account other goals such as private pension provision. Therefore, certain payments for old-age provision can reduce the taxable income and thus also the tax burden.
- Other social goals such as energy saving and the fight against climate change or the like can also be found in the taxable income: Here, deductions can also be made from gross income for a limited period of time and within specified limits, so that the taxable income sinks.
In summary, it can be said that the concept of taxable income, unlike incoming gross payments or gross amounts, is also subject to social change and political decisions over time. As a calculation variable, however, it is stable and fair to the extent that the laws are applied equally to all taxpayers.
Differentiation from sales tax
In general, sales tax on goods and services is calculated for every intermediate sale and accumulates with every sale. Value added tax, on the other hand, is only payable on the value added by companies. This means that companies can have the VAT paid on goods purchased, which they further process or sell, reimbursed (as input tax). Using the sales tax calculator is important here.
In relation to the example mentioned above, it looks like this: The manufacturer of the coffee machine purchases goods at a price of € 23.80. A total of € 3.80 of this is due to VAT. The manufacturer can have this amount reimbursed by the tax office as input tax. He then processes the goods into a coffee machine and sells them to a wholesaler for 47.60 euros. This, the producer only receives 40 euros, since 7.60 euros have to be paid to the tax office as sales tax. In total, the manufacturer paid 20 euros (net) in production costs and received 40 euros (net) in sales revenue.
Value added tax was introduced in the 20th century. Different assessment methods and tax rates are used around the world. At the turn of the millennium, around 120 countries levied value added tax. In the European Union, VAT has been legally standardized since 2006 by the so-called VAT System Directive.