Spain’s tax plans cause concern

Spain’s government to lower tax rates for businesses and employees, but the move raises concerns about whether Spain will meet EU budget laws.

The Spanish government last week approved cuts to Spain’s income and corporate tax rates, in a move that has upset the country’s socialists and is likely to cause consternation in the European Commission.

Cristóbal Montoro, Spain’s finance minister, announced on Friday (20 June) that Spain’s corporate tax rate would drop from 30% to 25%, while individuals will see their income tax bill fall by an average of one-eighth (12.5%) by 2016.

The government intends to reduce its top income tax rate, currently 52%, by seven percentage points. Those on incomes below €12,500 will see their tax rate fall from 24.5% to 19%. Mariano Rajoy, Spain’s prime minister, followed the news with a promise on Saturday (21 June) to cut taxes for the self-employed. The government is also expected to announce further measures as part of a wider reform of Spain’s tax system. Overall, the cuts would leave tax rates slightly above the levels before the financial crisis erupted in 2008.

Susana Díaz, the socialist leader of Andalucia’s government, denounced the cuts as “unfair and regressive” on Saturday. Several commentators interpreted the cut as a bid by Rajoy, of the centre-right, to win back voters who were disenchanted after several years of tax hikes, austerity and recession, ahead of elections expected at the end of 2015.

But the tax cuts will preoccupy the European Commission in more ways than one. Olli Rehn, the European commissioner for economic and monetary affairs and the euro, has already warned that Spain needs to provide more details on how it will control government spending to reduce its public deficit to -3% by 2015, or miss a target set by the EU.

EU budget rules limit public deficits to -3% of gross domestic product and countries with larger deficits, such as Spain, must give details of the steps that they are taking to reduce public spending or increase revenues.

In May, Rajoy surprised the European Commission by announcing a €6.3 billion stimulus package for the Spanish economy, just under half of which would be funded with public money.

The Commission has called on several eurozone member states, including Spain, to reform their tax systems, reducing taxes on labour and increasing taxes on consumption, pollution and property. The Commission argues that this would boost competitiveness and employment.

While Spain appears to have heeded the first part of the Commission’s non-binding recommendation, the government has yet to make any reference to increasing other taxes, such as VAT or environmental taxes.

According to Commission research published on 17 June, tax revenues in Spain accounted for 32.5% of gross domestic product, well below thee EU countries with the highest tax-to-GDP ratios: Denmark with 48.1%, Belgium with 45.4%, and France with 45%.

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