Does the tax increase worsen the economic crisis in Spain?

Taxes and Corporations

24/05/2013

There are many ways out of the crisis but it does not seem that the Spanish way is the most preferable.
Marta Garca Lpez

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Spain is undergoing the worst economic crisis that has lived so far. Prices and taxes rise, and yet income and employment decrease. Spain is one of the countries that are recovering more slowly from this crisis and many people suggest that this is due to the type of fiscal policy that it is being implemented by the country. Many leading economists are criticizing the high fiscal pressure that is being applied by the country on its inhabitants, and above all, on their workers. They are warning that this is not the way to go out of the crisis and that the fiscal policy in Spain should change drastically.

In countries like Spain, the "austerity" is based on the application of timid spending cuts combined with significant increases in the tax burden. This prolongs the depression of the economy. " Veronique de Rugy

In Spain there are different levels of administration: State, Regions and local administration. The various governments can levy taxes according to their skills. This is reflected in the general tax laws and rules governing the various taxes and fees. o The general state administration includes the following taxes: Personal income tax (PIT), Corporate tax, Income tax of non-residents, Wealth Tax, Business tax, Value Added Tax (VAT) and special taxes. Each Region has jurisdiction over the following state taxes in its territory: successions and donations tax, transfer tax, documented legal acts and wealth tax. The Regions may also establish its own taxes within limits set by the legislation. Some regions have established such taxes to protect the environment or fuel tax consumption. On the other hand, there is special tax system for some Regions: Navarra and Pas Vasco have a special tax system for historical reasons. Canarias, Ceuta and Melilla have their own tax system by its geographical location. Local authorities have a very limited financial autonomy and own finances competencies to impose taxes or tributes. Among them are: Business Tax, Property Tax, vehicle tax, tax on buildings, installations and works; tax on the increased value of urban land.

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Mariano Rajoy is Spain's new President since November 2011. He is the sixth President of the Spanish democracy. Rajoy belongs to the Popular Party is a conservative political party, center-right liberal Spanish. In 2011 Rajoy inherited a country ravaged economically by the crisis, indebted and in a very bad situation. It seems that the only possible solution was to raise taxes with the aim of raise more. Spain is one of the countries of the European Union (EU) with the highest tax rates in both the value-added tax (VAT), as in the income tax or corporation tax, according to the reports presented by the European Commission and Eurostat about trends in taxation in Europe. However, Spain is known for being one of the countries that collect less from those taxes relative to gross domestic product (GDP), especially in VAT, according to these reports. Rajoy has raised taxes 30 times in 16 months. He has increased income tax 5 times, 4 times the corporation tax, 3 times the special taxes, 2 times the VAT and the Property tax, 1 time the managers tax, and also he has extended the heritage tax and he has created 12 new rates.

We will focus on the analysis of two taxes, which have affected more recent years Spanish: VAT and Income tax. The Value Added Tax (VAT) is the basis of the Spanish system of indirect taxation. It is an indirect tax that falls on consumption, as a manifestation of the economic capacity susceptible of tax, and therefore, from an economic standpoint, it is the consumer who must bear the tax, even if the entrepreneurs and professionals required to deferring payment of tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs. The Income Tax is a tax on individual earnings (income) that is paid to the national government. It is a personal tax, progressive and direct that levied the income received in a natural year by individuals resident in Spain.

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The most important questions we must ask ourselves

1. Why did the government raise taxes? The Government went where-ever income tax and VAT-when he needed earn income for try to adjust the deficit, instead of attacking the unproductive public spending. It mattered little that this decision was dynamited the still weak economy with the labor market installed on absolute uncertainty, reform after reform. All experts agree that if they had not raised taxes, or if the increase would have been more selective, the economy would not have returned to this second recession. There is a famous phrase between the tax advisers that continues The problem is not paid many or few taxes, the problem is that always pay the same people.

2. How much have collected the government for these increases? Thank you to the increase of the Income tax they got 3.931 millions on 2012 2.957 directly from the payroll and the rest of the climb to savings income and non-residents-. For 2013, the forecast is for another 4,000 million, plus many others in 2014, as the government will maintain through 2015 income tax increase although Brussels will relax and delay by two years the deficit target. By the increase in VAT, the extra revenue in 2012 was 2.441 million, which is expanded to about 5,500 this year, as it applies to the whole exercise. To these numbers must be added the 5.925 million by increasing the installment payment of large companies. You have to add also other 301 by rising returns snuff and diesel. In total, Treasury pocketed 11,237,000 more in 2012.

3. Have these increases served to decrease the deficit? These 11.237 million served nearly 1.2 points to plug the deficit hole. And as the total deficit reduction this year has been two points-from 9% to 7% of GDP, that means that more effort in fiscal consolidation was due to higher taxes, and less to adjustments in expenditures, which has focused on the substantial reduction in public investment, resulting contribution to the economic downturn. 4. How Much Government grossed from the Income tax and VAT? The income tax is the tax that brings more revenue to the state. A rise in Income tax dry liquidity to the pockets and means less purchasing power. Moreover, in these years of crisis has not only been a direct ascent, but rather the rates have not been updated with inflation. That is, there has been a covert second rise in recent years with the CPI (consumer price index). For this tax grossed 70.619 million in 2012, mainly of average incomes. 21% of

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respondents listed with incomes between 25,000 and 54,000 euro contributing nearly 40% of revenues to the Treasury. For VAT, the second largest contributor tax, the levying was 50.464 million. The box for these two taxes represents three out of four euros in tax revenue. Almost equivalent to the total wage payments (97%) received all the employees. 5. What has been the effect of the tax increase in GDP? The rise in income tax stopped from earlier this year making spending decisions many families. This was coupled with, obviously the VAT hike, which directly penalizes consumption. In the National Reform Programme the government just sent to Brussels not recognized this impact on the economy in 2012, but recognizes the impact it will have in 2013. For example, the Executive recognizes that all fiscal consolidation measures provide a decrease in 2013 of 2.58%, about 26,000 million. If revenues in 2012 accounted for 56% of the adjustment of the deficit, that means that in 2013 this contribution will account for 1.44%, about 14,500 million. Obviously, this contribution will be higher in 2013 because VAT revenue occurs throughout the year. So in Reform Plan, Mariano Rajoy separate account the contribution to the degrowth of the economy by the VAT, and other amounts to 0.35 points. 6. Should the government lower the taxes? The Government should remove this stick from the wheel of economic growth as soon as possible to restore the consumption before the avalanche of pay cuts and the rise in unemployment.

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So, Should we change our tax system?

There are at least two reasons to seriously rethink the Spanish tax system: First, the whole system falls largely on labor income. According to the USAID Fiscal Reform and Economic Governance Project of 2011, 37.6% of tax revenues in Spain comes from income tax, while in EU countries is 32.7%. Secondly, because the same income tax is biased towards middle and lowincome workers. Spain has one of the most compressed tax scales. The difference between the maximum and minimum marginal rate is the second lowest in the graph.

This is not because the income tax is very low for all citizens. Spain has one of the highest minimum marginal rates in Europe, just behind Sweden and Belgium. The result is that in Spain the charges on labor are not enough progressive. Thus we come to the crisis with a tax system that is, in comparison with other EU countries, more burdensome on middle-lower and lower-income workers. The problem is that this crisis has not only intensified the worst aspects of the tax system but is ending any possibility that public spending can offset the inequalities derived from a little progressive tax system. In short, there are many ways out of the crisis but it does not seems that the Spanish way is the most preferable, burdensome tax system with the workers in low and middle income and fiscal consolidation that focuses on spending cuts. This model, is not the most balanced way to overcome the current situation, and is not the basis for a fairer society for the day after the crisis.