Monday, July 4

The Bank of Spain proposes to raise taxes on consumption, although with compensation for low incomes


The Bank of Spain has insisted this Wednesday in its 2021 Annual Report on the need for Spain to draw up a fiscal consolidation plan that allows it to redirect the high levels of State debt and the structural deficit that it drags and that has been aggravated first because of the pandemic and now because of the consequences of the war in Ukraine. The difference compared to previous occasions is that the supervisor has outlined some of the general lines that can be assumed to improve public revenue and reduce spending. To do this, he proposes, among other aspects, that the collection of taxes linked to consumption (VAT and Special Taxes) be raised and that the tax benefits that operate in Spain be reviewed.

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“The composition of income and spending has room for improvement, we have to act yes or yes,” defends the governor, Pablo Hernández de Cos, in an interview that the supervisor himself has released together with the report. Hernández de Cos defends that “there are only two options” in the plan to give greater “credibility” to the Spanish economy with a fiscal consolidation: “either reducing spending or increasing income”. He understands the person in charge of the organization that this decision has a clear “ideological component”, but encourages that whatever the decision is, it be made with “credibility”.

The Bank of Spain avoids specifying a path of tax reform for Spain, although it does point out that “academic literature” has indicated that there are “potential gains”, both for the efficiency and equity of the tax system, if greater weight is given relative to the taxation on consumption as opposed to that which taxes income. That is, to reformulate the contribution of the different fiscal figures to give greater importance to those that tax the consumption of households and companies (VAT and Special Taxes) compared to those that tax salaries or business profits.

The supervisor defends that with this reformulation of the tax basket in Spain “distortions in taxation on corporate and personal income” would be reduced. This is where he says that efficiency would be gained. But there is another face that advances the argument of the Bank of Spain to raise taxes on consumption, that of equity. “The additional income associated with the efficiency gains from the recomposition of the tax basket could be used to neutralize its regressive effects —above all, as a consequence of the higher taxation on consumption—”, states the report.

The Bank of Spain focuses on a compensation system to try to ensure that the rise in VAT, a tax by nature regressive, translates into a less distributive tax system. Thus, it proposes that the compensation be articulated both through adjustments in personal income tax or through a system of transfers to households with lower income. It does not indicate how much that compensation should be or for how many households. “The amount and scope of these compensatory measures should be established based on the distributive preferences of society,” says the document.

The organization headed by Hernández de Cos proposes, in order to improve income from consumption taxes, “review the tax expenditure associated with the established tax benefits.” Tax benefits in VAT —fundamentally reduced and super-reduced rates— account for most of the public spending in the cut in collection that occurs in Spain. However, the supervisor goes further and requests a “rigorous and independent” review of the “set of tax benefits” existing in the different Spanish tax figures, to determine if they “effectively and efficiently” meet the objectives that justified their introduction. and to eliminate those that do not.

The idea promoted by the Bank of Spain regarding VAT is not very far from the one presented a few months ago by the committee of experts for tax reform. In its White Paper, a proposal was set out that directed the tax system towards a single rate, instead of the three currently existing. This reform, as proposed by the Bank of Spain, would require the creation of a compensation system for households with lower incomes.

The Bank of Spain, which includes a section on the economic impact of climate change in the report, also focuses on environmental taxation, one of the pending tasks that Spain has. “The ambitious commitments that Spain has assumed in environmental matters in recent years contrast with the scarce development and articulation of environmental taxation in our country”, laments the supervisor. The report published this Wednesday encourages the Government to introduce “new tax measures on energy, hydrocarbons and transport.” Again, with compensatory measures for households with lower income and more vulnerable to these tax increases.

The report also overlooks possible policies regarding public spending. Among the general ideas proposed by the Bank of Spain is “an exhaustive review” that allows “increasing the efficiency of each budget item” and “optimizing the distribution of public spending between items to promote more robust and equitable economic growth.” It does focus on increasing public investment and the budget for education. “These are fundamental items both to boost economic growth and to reduce inequality,” says the report.

With the improvement in income and the rationalization of spending, the Bank of Spain encourages a redirection of debt and deficit levels. Hernández de Cos defends that fiscal policy “is the only instrument available to the national authorities to respond to an eventuality”, since monetary policy is in the hands of the ECB. “If you don’t have a margin or a cushion, you can’t respond”, he concludes about the need to have tools to deal with possible shocks in the future.



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