Text in which the author defends ideas and reaches conclusions based on his / her interpretation of facts and data

To pay, or not to pay

Discussion on income tax is a welcome variation on the monotonous theme of public spending

The most recent tax hikes in Spain have brought with them a storm, even though they were sugar-coated. Rather than new increases, they were a continuation of a “temporary” rise of income and company taxes, with the promise that it would be for one more year. The aim is to boost revenue and reduce the deficit.

The measure has raised a clamor on the right for a general tax cut. They want to water down the adjustment in company tax, and reduce other taxes. Their line is that such cuts would energize the economy, producing more revenue, because taxes inhibit growth. History, however, shows that in the 30 “glorious years,” from 1947 to 1973, the US economy grew at a rate of four percent, though the upper income-tax bracket then oscillated between 75 and 90 percent, even more than François Hollande wants. And the economic machine went on working.

Miguel Sebastián, a Zapatero man, is resuscitating the old motto that “raising taxes is leftist” (at least, income taxes) as a way out of the recession. One collaborator of Rubalcaba, Valeriano Gómez, replies that Sebastián also touted this as a good idea in the times of boom.

Discussion on income tax is a welcome variation on the monotonous theme of public spending. In reality, there is a wide margin for increasing revenue in Spain, because the fiscal pressure is eight points below the EU average, while public spending is only four points below.

But the fact that the gap vis-a-vis other EU states is wide, does not mean it has to be entirely closed just now. Above all, it does not mean it should be snapped shut with general tax hikes, when the urgent need is to raise consumption and demand. The measures to be taken should be very selective, guided by criteria both of revenue-gathering power and of equity. First, we must tax those who are not paying; i.e. prosecute tax evasion. In Spain this could bring in as much as 70 billion euros, almost twice the 39-billion-euro cost of servicing the public debt.

More and more voices, however, are calling for a general, far-reaching reform of the entire Spanish tax system, which has been built up piecemeal since the time of Franco. Some taxes are mere shadows of what they used to be. Spanish company tax is a sieve riddled with exemptions and deductions, each reflecting the clout of the lobby that pushed for them. Ergo, they are damaging to small and medium businesses in general.

Some 90 percent of tax revenue in Spain comes from income derived from work. Income tax has long ceased to be redistributive; it is a tax on the wage earner; income from capital escapes through a multitude of holes. This runs against the advice of Adam Smith: “It makes sense that the rich should contribute to public spending, not only in proportion to their income, but in rather more than that proportion.”

But how can this elusive income be brought into the tax system? One interesting idea has just been proposed by the Socialists, in a report called “Groundwork for fiscal reform.” The creation of a unified income/wealth tax, “integrating in a single tax category the appraisal of assets, homogeneously and without exceptions, with the payment of income tax.” Thus, income from assets (shares, deposits, real estate) would come under the same tax as salary income. A theoretical yield percentage would be applicable to the total quantity. In the Netherlands this system exists, considering asset income as four percent of the total, and taxing it at a rate of 30 percent. The report also proposes a relief in the tax on savings, by means of a class of “savings accounts” that would not be limited to pensions.

We urgently need fiscal reforms. Above all, so that everyone will pay; and so that those who are now paying may not have to pay quite so much; or at least, not have to pay what the tax evaders are not paying.

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