A very peculiar tax practice

High level of fraud and inefficiency characterize Spanish system

Taxes in Spain are bipolar: despite having some of the highest rates in Europe, this country also has one of the lowest fiscal pressures - 31.4 percent of GDP, compared with an average of 39.5 percent in the euro zone. "We have a tax system that produces less than it should," explains Ignacio Zubiri, chair of applied economics at the Basque Country University. This can only be explained by a high level of fraud - several studies estimated the underground economy to represent around 20 percent of GDP, about 70 billion euros in fiscal terms. The system is also deemed to be inefficient, filled with exemptions and deductions that let taxpayers off the hook.

Last month Brussels asked the government for "a systematic review of the tax system by March 2014." Finance Minister Cristóbal Montoro assumes that he will have to follow "the guidelines" established by Europe. But he will do it "once tax receipts are normalized, in a different economic scenario," he has said.

The Spanish economy is languishing and taxable income has been plummeting in recent years. Since the crisis began in 2007, it has decreased by nearly 200 billion euros, or 20 percent of GDP. Given this situation, the government is tinkering with all the major taxes, trying to milk the system to the fullest to make it through this national emergency. In the last year, it has approved around 30 new tax reforms to try to increase revenues, yet the system still fails to produce the desired results.

In recent weeks, a sector of the ruling Popular Party has spearheaded a campaign to ask Rajoy to reduce income tax. But Finance Minister Montoro is adamant: "There is no room for that." This is one of the most complex levies in the entire tax system, and causes thousands of taxpayers the same kinds of headaches that Albert Einstein got when he stated that "the hardest thing to understand in the world is the income tax."

We have a tax system that produces less than it should"

Juan José Rubio, former director of the Fiscal Studies Institute (IEF) and chair of public treasury studies at Castilla-La Mancha University, agrees that "income tax, the way it is designed now, cannot produce any more.

"The hike has created more distortions than revenues," he adds, warning that nevertheless "you cannot lower taxes without reductions in public spending."

Ramsés Pérez-Boga, president of the State Organization of Tax Inspectors, feels that "the excessive weight of work of income taxes should be reduced. It is not right that nearly 90 percent of income tax comes from employees. This should be balanced out with capital income and professional activities."

José Félix Sanz, chair of applied economics at Madrid's Complutense University and a researcher at the Savings Banks Foundation, defends a two-tier tax set at 25 percent and 35 percent. Brussels, meanwhile, is recommending the elimination of some of the system's multiple income tax and corporate tax breaks.

Most experts consulted for this story agree that tax breaks must be revised, since they cost the state close to 16.4 billion euros. The one that costs the most is for home purchases, around 1.8 billion a year, but Brussels is taking aim at deductions for private pension plans.

In any case, whatever reforms are finally embraced at the Finance Ministry, one thing is for sure: major corporations will continue to pay less than the average employee. Such is the way of the globalized world. Just ask Apple.

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