Government’s panel of experts recommends reducing income tax

A report drawn up for the government by a team of experts on how best to reform Spain’s tax system has been made public. The committee of “wise men,” led by Manuel Lagares, a professor of public finance, has recommended progressively reducing direct taxes and social contributions, while at the same time raising indirect taxes, such as VAT.

The committee argues that these reforms would have a positive effect on GDP of up to 0.3 percent a year, as well as producing a 0.2-percent rise in employment in the same period. They also argue it would bring about a slight improvement in the public deficit, but add the caveat that “it is the government that must establish the rhythm and the composition of the reform.”

- Higher VAT. The experts recommend a 3-point reduction for social contributions, which would bring government income down by around 1 point of GDP. At the same time, the experts have simulated an increase on consumer taxes, which would compensate for that negative effect. The results show that such a fiscal devaluation would have a positive effect on GDP, up to 0.7 percent in three years, as well as a 0.7-percent increase in employment.

- Income tax. The report recommends reducing the current number of tax bands from seven to four, in line with the European Union average. It also suggests significantly reducing taxes for the lowest-income bracket, from 24.75 percent to 20 percent, as well as the maximum marginal rates, which would be reduced from 52 percent to 44 percent.

- Incentives for families with children. The document calls for a revision of tax breaks for parents with children aged under three years, should both parents be working out of the house. The aim is to counteract the low birth rate and encourage work-family life balance.

- Incentives for pension plans. The team coordinated by Lagares believes it is necessary to maintain the current fiscal conditions for pension funds, given Spain’s aging population and the absence of obligatory private pension schemes.

- Revision of deductions according to region. The text recommends revising “the deductions applied by regional governments with the aim of simplifying [the system] and avoiding distortions for the unity of the market.”