SPANISH ECONOMY

Spain planning tax hikes for highest earners as part of expansive budget

Minority government’s blueprint allocates a record €239.8 billion to public investment to overcome the coronavirus crisis

PM Pedro Sánchez (l) and Deputy PM Pablo Iglesias presenting the 2021 budget plan on Tuesday.
PM Pedro Sánchez (l) and Deputy PM Pablo Iglesias presenting the 2021 budget plan on Tuesday.Borja Puig de la Bellacasa / EFE

Spain’s governing coalition partners have agreed on a set of tax hikes for high-income individuals and corporations that will affect a small number of taxpayers but which is meant to carry political and symbolic value.

The extra revenue is meant to help fund an ultra-expansive budget to lift Spain out of a deep crisis caused by the coronavirus pandemic, with a special focus on shoring up the healthcare system. The budget plan contains a record public investment of nearly €239.8 billion.

After reaching their own internal deal, the partners in the minority government, led by the Socialist Party (PSOE) and the leftist Unidas Podemos, must now seek wider congressional support for their blueprint.

“This is a progressive budget; it is exceptional due to the situation and because of the amount of public investment involved,” said Prime Minister Pedro Sánchez of the PSOE. “The first goal is to rebuild what the crisis took away from us due to the pandemic. The second is to modernize our productive model. And the third is to shore up our welfare state.”

The prime minister said the budget plan contains 10.3% more investment, “including the €27 billion advance from the European [recovery] plan.”

Tax rates

If the hikes are approved, large business groups will pay more corporate tax through limitations on deductions involving dividends and capital gains obtained through subsidiaries. Tax will go up three percentage points for capital gains of €200,000 and over, and two points for wage and salary income of more than €300,000. Unidas Podemos had first proposed a threshold of €200,000, and the original governing agreement between both political groups had talked about €130,000.

While there are no precise figures on how many people could be affected by the changes, Tax Agency records show that around 112,000 taxpayers are declaring more than €100,000 on their income tax returns, representing 0.5% of the total.

The deal also sets a minimum tax rate of 15% for real estate investment trusts, a type of company often used by wealthy individuals to save taxes. Private pension plans will get fewer deductions, and wealth tax will increase by one percentage point for fortunes of more than €10 million, although this provision is difficult to implement because wealth tax is in the hands of regional governments.

The budget blueprint significantly increases investment in public healthcare: nearly €3.1 billion more, or a 151.4% rise, according to Sánchez. It also contains new tax rates for sugary drinks and levies on single-use plastics, as well as other green taxes.

The plan will likely be debated by Spain’s lower house, the Congress of Deputies, in mid-November. The coalition government does not have an absolute majority in Congress, meaning it will need the support of other parties to pass the plan. The government hopes to secure this support from the parties that helped Sánchez return to the prime minister’s office in early January. The door is also still open for talks with the center-right Ciudadanos (Citizens).

Budget approval is a key goal for Sánchez’s administration. Spain has been functioning since 2018 under the budget approved by the previous conservative administration of Mariano Rajoy, and Sánchez’s inability to secure backing for a new spending blueprint already triggered one early election in April 2019.

English version by Susana Urra.

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