Now that we are talking about taxes, how should the tax system be?

  • Not all the measures that the Government wants to implement are in line with the expert report for tax reform

  • The energy crisis and the threat of recession in 2023 make it difficult to introduce more far-reaching changes

  • Spain has a structural public deficit that requires rethinking “above all, the income side”, concluded the White Paper on Tax Reform

Now that there is so much talk about taxes, what should the Spanish tax system be like? Are the proposals on the table in line with what the seventeen authors of the White Paper for Tax Reform?

VAT: We could collect more

If you ask an expert, they will probably start with this section: indirect taxes. Why? Because it is one of the weak points of income in Spain. “It is a tribute with enormous collection potential,” explains one of the report’s authors. However, in our country it is far from its potential. Only Italy and Romania earn less than us for VAT (this is always measured based on the size of each economy).

The experts suggested “review and reduce” reduced and super-reduced rates.

A low VAT makes many essential products cheaper for households with fewer resources, but the benefit is even greater for those with more income. “55% of the tax benefit represented by the reduced rates is concentrated in the richest 40% of households“experts say.

The context of war is not the time to raise VAT. In fact, the Government has lowered it for electricity. That may mean this year to give up 1,600 million euros of collection. It is almost the same as what is expected to enter with the new tax on large fortunesto get an idea.

Removing products from reduced VAT and moving them to 21% can affect essential goods and services. That is why the report it also said that it was essential “to establish compensation for the lowest incomes”. And therein lies the question, technically it seems like a very good solution, but politically it is very difficult to sell the idea to citizens: “pay more for VAT, but I will help you on the other hand”.

Increase the bases in personal income tax

Personal income tax is the tax that collects the most. Last year, 94,500 million euros. This year Treasury is entering 17% more and the forecast is to exceed 100,000 million for the first time. What is recommended here? Experts speak of “widening the tax bases.” That means taxing a higher volume of workers’ income.

  • Translated means that some more would pay more what they do now in personal income tax if some deductions are eliminated, which according to the analysis, do not work well.
  • To help the lowest income Negative taxes are proposed, which is like giving money directly to the taxpayer.

What the Government has done is improve the situation of those who earn less than 21,000 euros a year, increasing what can be deducted from their declaration. It’s not exactly the same. The cost of the measure is 1,800 million euros over two years.

On the other hand, the experts they believe it is convenient to change the way in which they pay economic activities and self-employed workers in personal income tax. The Executive has chosen to leave everything as it is somewhat reducing taxes on this group. A patch.

inequality and wealth

The increase in inequality and the concentration of wealth is a challenge for the vast majority of countries. It is not just a question of justice: it is a threat to the economy. More than ever it is necessary to pay attention to the redistributive power of both income and expenses. But without losing sight, experts say, that wealth cannot be distributed only with taxes: spending is more effective (and this in turn requires resources).

“Spain is currently one of the European Union countries where income inequality measured with the Gini index is higher“, according to data from the European statistical office, Eurostat. And the tax system we have does not redistribute very well.

  • The group of experts recommended keeping these taxes on wealth. “It makes perfect sense to apply them”, but a minimum should be established for everyone, regardless of where they live.
  • The government has gone off on a tangent creating a new “Solidarity tax on large fortunes” (supposedly temporary). United We Can intend to make it permanent. This tribute will be like a broom car: it will enter what the regions have subsidized in the Wealth Tax.

Gruyère cheese in societies

In the case of corporate tax, we must think in the context of globalization. The Government has long supported a minimum tax on multinationals to prevent the flight of profits to territories with lower taxation. The phenomenon is very similar to that detected in the Wealth Tax. That is why the more coordinated the solution, the better.

  • In addition to this need, the Spanish system has many holes for which the company tax bill can be reduced. The report recommended a list of revisions to plug this lower collection.
  • Government has only announced a temporary change so that large companies can reduce less the invoice of this tax.
  • And for SMEs, it reduces the rate from 25% to 23%.

It is possible that at times, the tax debate arrives with so much noise that it operates in ‘tunnel mode’: up or down. A broader vision is the phrase with which the experts’ report began:

“Any tax system must go hand in hand with the public spending needs expressed by citizens through democratic institutions.”

And the numbers are stubborn: Spain systematically collects less than it spends. Our deficit is structural and that forces us to borrow every year. Is it because public spending is too high? There is a gray scale, but the experts also answered this question: “the greatest Spanish public deficit has to do, above all, with what happens on the revenue side.”

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