Why does Spain collect less income tax than its EU neighbors?

The experts attribute the shortfall to the generous exemptions, deductions and rebates available in Spain, as well as to widespread fraud. It is a similar story with sales tax (IVA), where Spain collects around half a percentage point less than the EU average contribution, says the latest report from the EU’s statistics office, Eurostat.

José Ignacio Conde-Ruiz, a lecturer at Madrid’s Complutense University, explains that while Spain’s marginal tax rates (the rates of tax that earners incur on each additional euro of income), are similar to the EU average, but that effective tax rates (the average rate at which an individual’s earned income is taxed and the average rate at which companies’ pre-tax profits are taxed) are too low, “because of loopholes in the system,” he explains, adding: “Deductions interrupt the progressive nature of income tax, benefiting the well-off.”

By widening our bases, we would be able to close the difference in the tax burden by 60% Alejandro Esteller, Barcelona University

José Félix Sanz of the Funcas think-tank blames successive income tax reforms, many of them carried out for electoral reasons. “The wealthy are able to move their money into companies, while the less-wealthy don’t pay taxes because the starting rate is too high,” he says, adding that the salaried middle classes end up bearing most of the tax burden.

He also blames Spain’s system of “módulos” – applied to the self-employed, who pay some of their taxes according to predicted rates for their sector, rather than having to present records of all their earnings. The modular system is being phased out, and will be kept only for a very limited percentage of taxpayers.

Sales tax collection has improved in Spain over recent years, boosted in part by increased consumer spending, which has partly driven growth over the last two years. But sales tax still contributes half a percentage point less toward GDP than the rest of Europe, and there are any number of special regimes for the hospitality and tourism sectors where lower rates of sales tax are applicable. Brussels has called on successive Spanish governments to raise the levy on those goods and services now taxed at 10% to 21%. Cristóbal Montero is the latest finance minister to refuse to do so.

Deductions interrupt the progressive nature of income tax, benefiting the well-off José Ignacio Conde-Ruiz, Complutense University

Alejandro Esteller of Barcelona University and a researcher at the Barcelona Institute of Economics says that while tax evasion needs to be tackled, the real problem lies with tax bases, the measure upon which the assessment or determination of tax liability is calculated.

“By widening our bases, we would be able to close the difference in the tax burden by 60%. We are simply under-using our economic capacity,” he says.

Santiago Díaz de Sarralde, a lecturer in economics at Madrid’s Rey Juan Carlos University, says that Eurostat’s latest figures “debunk the myths about taxes,” and the widespread belief that social security contributions are too high and company and income tax too low.

“The reality is a different story,” he says, explaining that social security payments’ contribution to GDP is three percentage points lower than the EU average, and that the contribution of income tax is two percentage points lower. But that of sales tax and corporate tax is virtually the same. “We have a weak productive structure with high structural employment and low salaries,” he argues.

Corporate tax is equivalent to 2.4% of GDP in Spain against an EU average of 2.5% while social security payments equal 12.3% of GDP in the country with that figure being an average 13.2% for the EU as a whole.

English version by Nick Lyne.