Various tax figures can contribute to balancing public accounts, each one with different impacts on the economy. Therefore, just as any proposal related to public spending must be accompanied by a financing plan, those who oppose tax increases or demand reductions must present viable alternatives.
A phrase attributed to Pedro Solbes reflects the complexity of the negotiations to approve the General State Budgets (PGE): “All governments are coalitions: on the one hand the Minister of Finance; On the other hand, the rest of the ministers, whose function is to spend, corresponds to the person responsible for the Treasury to define the maximum expenditure and its distribution.”
The PGE consists of two main parts, expenses and income, with 85% of the latter coming from taxes and social contributions. With a coalition government, which must ensure the support of various parliamentary forces, the negotiations to approve the PGE reveal the policies of each party, both in terms of expenses and their financing. While we wait for the new PGE to analyze expenses, I propose focusing on income.
To preserve the welfare state without increasing debt, it is essential to guarantee sufficient income. After years of extraordinary expenses due to the pandemic, the energy crisis and inflation, and considering the positive economic outlook provided by international organizations, the time has come to work on balancing public accounts.
The recent tax reform appears to have fallen short of the expectations set out in the White Paper on Tax Reform. The Government has admitted that, to comply with European commitments, it is necessary to “promote the convergence” of tax collection with the European Union (EU) average: in short, raise taxes. Now it is important to analyze where there is room to improve collection.
According to the Annual Tax Report 2024According to the European Commission, although Spain has made progress in tax collection, it is still below the EU average in terms of tax pressure. According to the IMFsince 2020, income taxes and social contributions have increased driven by inflation and the improvement of the labor market. VAT has also seen an increase in revenue, partly thanks to the fact that the increase in card payments has helped reduce tax fraud. Together, these changes have allowed us to reduce the fiscal gap with neighboring countries by half.
In light of these data, it is not true that many taxes are paid in Spain, especially if public services are desired at the level of more developed countries.
However, fiscal pressure, measured as revenue as a percentage of GDP, can be a complex indicator. The European Commission uses implicit rates, which measure the effective tax burden by relating taxes to their respective bases. Simplifying, taxes on consumption (VAT and excise taxes on products such as alcohol or hydrocarbons) are compared to household consumption, while taxes on labor (social contributions and part of personal income tax) are related to salaries. .
The following graphs compare the implicit rates of taxes on consumption and labor published by the European Commission for the four largest economies of the European Union and for the latest available year, 2022.
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The first graph shows that the implicit rate of consumption taxes in Spain is 14%. Although the general VAT rate is 21%, several factors explain why the effective rate is lower, such as tax fraud (consumer expenses that evade paying the tax), reduced and super-reduced rates (4% and 10%, respectively) and exempt products (such as healthcare and education).
To complete the information, the following table shows the position of the four countries in the EU according to the implicit rate of both types of taxes. Rank 1 corresponds to the country with the highest rate, and 27th to the country with the lowest.
EU position
Spain is close to the EU average in work-related taxes, although it has the lowest rate of the 4 countries compared. What really stands out is that it occupies the last position in terms of consumption taxes, with an implicit rate of 14%, compared to 16% in Italy and Germany and 18% in France.
One of the factors that explain this low implicit rate on consumption is that it is calculated as a percentage of domestic spending, which includes tourist spending, which in 2022 achieved one of its best results. Furthermore, hospitality services and other tourist services are taxed at 10% in Spain and represent a significant part of total consumption, reducing the collection from this tax. Although tourism is key to the Spanish economy, it would be important to diversify our productive structure and move towards a model based on non-tourist services with greater added value, which have been key to economic growth in recent years.
Although VAT is an important source of revenue, it is a tax that can be regressive and requires effort for consumers. Therefore, it is crucial to also consider other more progressive taxes, maintain the tax on energy companies and complete environmental taxes, just to mention some recommendations from experts.
On a positive note, it is worth mentioning that next year the global minimum tax of 15% will come into force for multinationals with a turnover of more than €750 million. The union of finance technicians (Ghesta) estimates an annual collection of more than 3.5 billion euros, which is essential to combat aggressive tax planning by companies.
In conclusion, various tax figures can contribute to balancing public accounts, each one with different impacts on the economy. Therefore, just as any proposal related to public spending must be accompanied by a financing plan, those who oppose tax increases, or demand reductions, must present viable alternatives, either through increases in income through other means or through of spending cuts. Not recognizing that taxes are essential to sustain the welfare state is to deceive citizens, since, after all, nothing is free.
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