Spain Becomes One of Europe's Highest Taxed Countries

March 5, 2012

In the face of mounting debts, the newly elected conservative government in Spain has opted for a deficit-reduction package with a mix of tax hikes and moderate spending cuts.  However, this policy will fail in both regards, as it raises taxes to stifling levels while failing to address areas of spending that are culpable for the greatest waste, say Juan Ramón Rallo, Ángel Martín Oro and Adrià Pérez Martí of the Cato Institute.

  • The new package, which contains spending cuts of nearly 9 billion euros (almost $12 billion), also implements one of the largest tax hikes in recent history, aimed at raising 6 billion euros (nearly $8 billion).
  • The increases will be realized on capital gains, income and real estate taxes.
  • The highest marginal rate will be raised to the third-highest in the European Union (52 percent), following those of Sweden and Belgium (56.4 percent and 53.7 percent, respectively).
  • The policy will also raise the highest marginal rate on capital gains from 21 percent to 27 percent, matching that of Germany and nearly reaching the level of Sweden.
  • The burden of the tax is even greater when it is taken into account that Spain is among the poorest countries in the European Union (and has the highest unemployment rate at 23 percent), meaning that its people are among the least able to stomach these high taxes.

These tax increases will hamper foreign investment and reduce Spain's ability to compete in the global marketplace.  Furthermore, it will reduce workers' disposable income, thereby harming aggregate demand and saving.  The government should instead recognize trends in its spending growth and seek to control that pattern first.

  • The ratio of government spending to gross domestic product (GDP) from 2001 to 2007 increased slightly from 38.6 percent to 39.2 percent in Spain.
  • While this growth may seem modest, it bears mention that the GDP of Spain grew at an artificially high pace in these years through expansive credit and a booming housing market.
  • The budget balance adjusted for cyclical factors shows that there was not a single surplus year from 2001 to 2007.

Spain's economy is burdened by substantial social spending on public-sector wages and benefits -- this must be targeted for effective deficit reduction.

Source: Juan Ramón Rallo, Ángel Martín Oro and Adrià Pérez Martí, "Spain Becomes One of Europe's Highest Taxed Countries," Cato Institute, February 29, 2012.

For text:

http://www.cato.org/publications/economic-development-bulletin/spain-becomes-one-europes-highest-taxed-countries

 

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