Tax fraud in Spain, focusing solely on income that manages to escape personal income tax (IRPF), worsens as taxpayers’ wealth grows. Consequently, the collection gap in this tax figure is around 7,000 million euros per year.
In the vast majority of the population segments analyzed, tax compliance is almost complete, since the vast majority of taxpayers hide a minimum part of their income, approximately 3%. Fraud, however, increases as wealth increases, reaching 13% of income not declared in personal income tax in the richest 0.4% and a maximum of 23% in the case of the wealthiest 0.1% of the population. On the other hand, the poorest 10% would hide around 8% of their income, a figure similar to that which the best positioned 5% fail to declare.
The data comes from the report Inequality and social pact, coordinated by the professor and economist Luis Ayala Cañón and prepared by the La Caixa Foundation. According to the document, “compliance decreases as we go up the income scale, especially among the richest 5%”, something that fully impacts the progressivity of the tax system and collection.
The concealment of income includes evasion, avoidance and emptying of the tax base of the tax. For this reason, “given that fraud is concentrated on certain types of income, and among those with high income levels, the effective progressivity of the tax ends up being lower”, explains the report.
In turn, since personal income tax is a progressive tax, the fact that fraud is concentrated among the population with the highest income entails a significant loss of collection. The tax gap associated with these practices, according to estimates from the founding of the banking entity, stood at 7,101 million euros in 2017 (last year with available data), which corresponds to 9% of the potential income from personal income tax in that year and 0.7% of GDP.
To prepare all these calculations, the experts who have written the report have compared the personal income tax collection data with those obtained through the National Accounts of the National Institute of Statistics (INE). Thus, while the participation of work in the income declared in the tax has oscillated around 80% in the last 40 years, in the Statistics data this participation is about 10 points less (around 70%). “As the National Accounts is usually considered a reliable reference framework, which captures all income regardless of its tax treatment, this fact indicates that a significant part of non-wage income is not correctly declared in personal income tax,” they point out.
Within all the sections related to tax fraud, the La Caixa Foundation report encourages special attention to be paid to income from undeclared investments abroad, “given that the use of tax havens is usually carried out by large fortunes” . According to calculations, the hidden income could reach 30% of the declared financial income (about 15,000 million), so the hidden income would be around 4,500 million euros.
Solutions
There are a series of aspects and regulatory changes that can limit fraud and its inequitable and regressive effects. Experts, for example, recommend stopping treating income differently depending on its origin, through tax privileges or poor assessment and imputation mechanisms. “These differentiated treatments generate inequality among taxpayers, no matter how much it is done legally.” Specifically, a broad definition of the tax base could be applied that limits tax privileges and exemptions. This includes “taxing the actual values of rents, for example, by eliminating objective estimation and using values closer to market values in imputed rents”.
Another aspect to take into account would be the possible regional harmonization, since the existence of tax differentials between regions encourages changes in the tax residence of taxpayers. The document, therefore, proposes “to promote tax harmonization, both internationally and within the autonomous state, with the aim of making it difficult to hide income in tax havens and the dynamics of downward competition.
#Tax #fraud #increases #income #grows #richest #hide #income