The Spanish economy falls back on the canvas.
He had not yet fully recovered from the previous crisis and the pandemic has brought him down again.
The coronavirus has triggered a recession of historic dimensions.
It has put the health system on the ropes, has stressed schools and institutes and has been a cyclopean challenge for public institutions, which have sometimes been overcome in this fight.
The frames that supported the welfare state, which were taken for sure and robust, now seem more unstable.
Public administrations have come to the rescue to alleviate the disaster.
They have launched an expensive labor protection network (the so-called ERTE), they have deployed plans to help families, the self-employed and companies, and they have ensured the flow of money with a multi-million dollar line of loans and public guarantees.
But the share of damage that this crisis will leave will be extensive and bitter.
High unemployment figures, increased inequality and, above all, it will stress the seams that sew intergenerational solidarity.
Stitching up these wounds requires determined action.
But the institutions arrive with lead in their ankles.
Spain accumulates a public debt equivalent to all its production for a year (100% of GDP), the deficit - the difference between public expenditure and income - will mark a new regrettable historical record.
And it will cost to reduce it.
In this situation, citizens wonder what to do so that the administrations can keep up the pulse.
And faced with this challenge, there are only two ways: raise more or spend less.
Before answering this dilemma, the context must be analyzed.
Spain is a country whose level of public spending and income is well below the European average.
For decades there was a certain consensus among the ministers who occupied the office of the Royal Customs House, where the Ministry of Finance is located, that the level of tax pressure, which measures the weight of tax revenue with respect to GDP, should be around 38%, very far from our neighboring countries.
But Spain needed to grow more to recover the ground lost during the autarky and after joining a market economy late.
So the socialist ministers played to slightly raise that bar and the popular ones to lower it.
Forty years later, Spain has changed.
Globalization, digitization and the wounds of successive crises have modified social needs.
So the time has come to rethink what our tax system should look like.
These are the main keys:
1. Low fiscal cushion
Spain is facing this crisis with little fiscal space.
Public debt exceeds 100% of GDP, almost 60 points more than in 2007. After more than a decade of adjustments, it has not yet been able to put an end to the red numbers.
Gone is the surplus from the time of the housing bubble.
These weaknesses are inherited from the financial crash, the bailout of the banks, but also from the lack of fiscal discipline of politicians.
The symbol of this was Rajoy's tax cut in 2015, which brought him a harsh reprimand from Brussels.
"Since then, the structural deficit [the one that does not depend on the economic cycle] has continued to increase," says Ignacio Conde-Ruiz, professor at the Complutense University and deputy director of Fedea (Foundation for Applied Economics Studies).
Pedro Sánchez has not made any effort to clean up the accounts in his first two years.
The inability to reduce the deficit - a problem aggravated by the budgetary instability in the last three years - prevents the reduction of public debt.
For this reason, Spain has much less fiscal margin than Germany.
And that will show in the ambition of the measures to alleviate the crisis and stimulate recovery.
Among all the pessimism there are two good news: one is that the ECB is giving oxygen to the most lagging countries like Spain or Italy, preventing the risk premium from skyrocketing as it happened a decade ago.
"Fiscal consolidation is going to be a matter of two or three legislatures"
Professor of Economics and researcher at Funcas
The other is that the previous crisis seems to have taught a lesson.
This time there is consensus that an adjustment too early will punish the recovery.
Both the Bank of Spain, the Fiscal Authority (Airef) and the OECD recommend designing a plan for several years, but maintaining the aid for the time being.
"Fiscal consolidation is not going to be a matter of a few years, but of two or three legislatures", predicts José Félix Sanz, professor of Applied Economics and director of tax studies at Funcas.
“And I would say that an added requirement is that it be agreed by the main political forces.
It would give credibility ”.
2. Tax pressure far from the average
This crisis has revived the debate on the welfare state and the more than six points of fiscal pressure that separate Spain from the EU.
Our country is closer to the liberal models led by the United States or Ireland than to more social models such as France or the Nordics, where the welfare state is part of the heritage of citizens.
The tax burden in Spain is six points below the EU average
Given this, one must ask if there is an optimal level of tax pressure.
According to experts, no.
"It depends on social preferences," answers Conde-Ruiz.
"But what we do have are reference levels," adds José Moisés Martín Carretero, economist and consultant: "If we want to have a social state that covers well-being guarantees at the same level as the eurozone, the logical thing is that we have income and similar expenses ”.
The main gaps are in personal income tax, social contributions and VAT.
Several agencies have already recommended adjustments in this regard to finance the recovery.
The Bank of Spain has put the magnifying glass on VAT and special levies with particular attention to green taxes, where Spain is far from the EU.
Meanwhile, countries like Germany have announced tax cuts.
"We can't because we don't have resources," says Jesús Ruiz-Huerta, emeritus professor at the Rey Juan Carlos University and director of the Alternativas Foundation Laboratory.
"Although the level of fiscal pressure is a matter of collective decision, if we compare ourselves with neighboring countries, in my opinion, there is a serious problem of fiscal space."
Rafael Doménech, professor and head of Economic Analysis at BBVA Research, adds another angle: implementing reforms that reduce the structural unemployment rate and increase the potential growth of the economy and, therefore, income.
"Neither this year nor next year we will be able to raise taxes or lower spending, but we will be able to lay the foundations for growth."
3. System holes
The main taxes in Spain have a lower weight on GDP than the EU, but their nominal rates are in the average.
So why is it collected less?
There is no single answer: a production model more focused on services, the scarcity of medium and large companies or high structural unemployment.
But there is a certain consensus that part of the problem is in the multiple exemptions, deductions and reduced rates that turn the system into a sieve through which billions of euros escape.
Airef has just reviewed the main holes in the system.
It quantifies them at 35,000 million a year.
Her conclusion is that there are distortions in the deductions of pension plans, joint taxation and the rental of housing in personal income tax, tax advantages for sicavs and Socimis and reduced VAT rates.
Only the latter, which apply to essential goods but also to the tourism sector, represent a decrease of 18,000 million a year.
"They generate high spending for the State and are not progressive enough, but if they are removed for important products for the lower layer of society, sufficient income must be guaranteed to compensate," warns Susana Ruiz, head of Tax Justice at Oxfam International.
Conde-Ruiz also emphasizes public prices, such as university tuition or highway tolls.
"In Spain they are lower than in other countries, and that is regressive: perhaps it would make more sense that the university was not so cheap but had more scholarships."
4. The efficiency of public spending
Improving spending efficiency is another pending challenge.
The World Bank indicators leave Spain in a worse position compared to its neighbors in northern Europe, and corruption scandals or the inefficiency of some services fuel the distrust of citizens.
According to the latest CIS survey, more than half of Spaniards consider that they benefit little from what they pay to the Treasury.
"That's why messages about tax cuts are more popular here, because there is a certain mistrust that the public sector is going to spend resources well," Doménech analyzes.
"Spain makes 'low cost' public policies of low impact"
JOSÉ MOISÉ MARTÍN CARRETERO, ECONOMIST
Airef has also reviewed a good handful of public policies and has concluded that in several areas it is neither managed nor planned well, for example in public subsidies, in pharmaceutical co-payment systems and in active employment policies.
“It is not so much about cutting back, it is that cheap is expensive”, summarizes Martín Carretero: “We do
low cost
policies
with little impact;
investing more in planning and evaluation we could achieve many more effects ”.
5. Should we create a tax on the rich?
The tax increase on the richest had long been in the international public debate.
The influential economist Thomas Piketty reopened it after noting an increase in income and wealth inequalities in recent decades, and the discussion has regained strength with the pandemic.
In Spain, United We can have proposed creating a tax for large fortunes, but the Government has put the proposal in a drawer.
In reality, Spain already has two taxes on wealth: inheritance and donations and patrimony.
The latter is under the spotlight.
It is assigned to the communities, which can apply, as Madrid does, generous exemptions and de facto cancel its collection.
But there is debate about its low collection capacity and the international trend is to eliminate it.
The Government proposed to harmonize both taxes before the pandemic.
In addition, the coalition agreement envisaged increasing personal income tax rates to income above 130,000 euros and to capital income above 140,000 euros.
"A better designed or applied wealth tax would provide more resources"
ALEJANDRO ESTELLER-MORÉ, PROFESSOR OF ECONOMICS
"Better configured and applied, the wealth tax could contribute resources to the system, although not in excess", considers Alejandro Esteller-Moré, professor at the University of Barcelona.
“If we want to increase collection, and we have already seen that it is due to the existence of a structural deficit, it is inevitable to increase the fiscal pressure on the middle classes.
To avoid the potentially regressive effect, the tax burden on capital could be raised: tax on wealth and even on capital gains ”.
One of the drawbacks that is usually put to the wealth tax is that modifying it or raising it excessively only on a national scale could generate an effect of transfer of wealth to other countries with less taxation.
For this reason, proposals have also been launched to create a temporary European tax on large fortunes - such as that of the economists Emmanuel Saez, Gabriel Zucman, and Camille Landais - or to tax more the extraordinary profits that large companies, especially technology companies, are achieving with this crisis.
Measures of this type can also have effects on the average perception of the taxpayer: according to the CIS, only 15% of the population believes that those who have the most pay more.
“This has to do with the construction of social perception.
That this time more is being demanded of those who have been hit less.
Let's call it what we want, but the wealth tax needs to be redesigned, ”says Ruiz, from Oxfam International.
6. Digital rate and taxation for the XXI century
Globalization and the emergence of digital business have jeopardized tax rules around the world.
Tech giants and large corporations divert billions of profits each year to low-tax territories, some of them in the heart of the EU, such as Ireland, the Netherlands and Luxembourg.
This situation has generated a race to the bottom in corporate tax.
Spain, where this figure collects half that before the Great Recession, is processing a new digital rate - known as the
Google rate
- to make technology companies pay more.
But the lack of a global agreement calls into question its potential.
Green taxes are another modern tax figure that has taken over the debate.
In Spain, the pressure of these taxes on GDP is 1.8%, lower than the 2.4% of the EU average.
The coalition agreement between the PSOE and Unidas Podemos already planned to raise them.
With the pandemic, the OECD has recommended raising them and Brussels has proposed creating two rates for carbon dioxide emissions to finance the recovery.
The other side of these taxes is that they tax consumption and could affect the most disadvantaged classes.
"You have to be very careful, green taxation serves to facilitate the ecological transition and environmental sustainability, but not to solve a problem of structural deficit", says Doménech.
“If we don't give anything in return, we can find ourselves with social discontent as has happened in France.
There are proposals that have a lot of common sense, which what they indicate is that if green taxation is increased, part of what is collected will be redistributed to that part of society that is harmed, for example through public transfers, income aid.
You tax pollution but you fight social discontent ”.
7. The burden of fraud and the black economy
From invoices without VAT to evasion of large assets or the drug trade, tax fraud and the underground economy generate a significant gap for the public coffers every year.
"It is difficult to give a figure, there are only estimates," says Carlos Cruzado, president of the Ministry of Finance (Gestha) Technicians.
Spain tends to appear among the worst placed European countries in the
informal economy
rankings
.
That is why politicians always bring up the fight against fraud as a patch to balance the accounts.
But it's not so easy.
It not only depends on new rules, but also on improving tax awareness.
Conclusions
one
Spain has a structural deficit that has not stopped growing in recent years, despite the economic boom, and the pandemic will raise the hole to an all-time high.
two
Rebalancing the accounts will require years of adjustment.
Experts agree on the need to achieve a fiscal pact that covers several legislatures.
3
Spain's tax burden is six points below the EU average and opens the debate on the welfare state model to which the country aspires.
4
The Spanish tax system loses billions of euros in discounts, deductions, exemptions and reduced rates of taxes.
Experts mostly point to low and super-low VAT rates, but there are holes in other figures.
5
Several public policies have scope to improve their efficiency through better design, planning and evaluation.
Spending rationalization would allow it to be redirected towards more effective tools.
6
Globalization and digitization require modernizing the system.
Green taxation has room to be high.
The digital tax aims to achieve a fairer tax rate for large corporations, but the lack of an international agreement calls into question its potential.
recommendations
1
Pace fiscal consolidation to recovery
Raising taxes or lowering spending before the economy grows again will drag down the recovery, but it is time to announce a medium-term plan.
2
Reach a long-term political agreement to design an ambitious fiscal pact
Obtain an agreement from several legislatures to undertake a comprehensive reform of the system that guarantees the welfare state.
3
Review the bonuses and exemptions that reduce the collection
Detect and modify those bonuses, deductions and reduced rates that do not meet their objective.
4
Improve the efficiency of public spending
Improve the planning, design and evaluation of public policies, review rates and copayments.
5
Adapting taxation to the new times
Modernize the system.
Promote new figures such as green taxation and the digital tax.
The expert's opinion
Jesus Gascón
The general director of the Tax Agency assures that tax amnesties are counterproductive and trusts that the rate of fall in collection will be less than the collapse of the economy.
Pascal Saint-Amans
The director of the OECD Center for Tax Policy and Administration argues that a 'global Google rate' is a matter of justice.
Recommends that Spain increase green taxation and reduce the weight of social contributions.
Susana ruiz
The head of Tax Justice for Oxfam International defends reviewing the taxation of higher incomes and assets and companies that have had extraordinary results with the crisis.
Jose Felix Sanz
The professor of Applied Economics and director of Tax Studies at Funcas foresees that the fiscal adjustment will take several years.
Recommend a consolidation plan that focuses on controlling public spending before raising taxes.
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