21/03/2014
Miguel Marín is the Director of FAES Foundation Economy and Public Policy Department
The report of the Committee of Experts designated by the Government to lay the foundations of a much needed tax reform in our country marks a significant milestone in the process that began in July 2013. Any economic reform in a country that, like Spain, aspires to hobnob with major world economies needs to be preceded by a process of calm reflection as well as civil society involvement in order to maximise the credibility and durability of the implemented measures. Said report, which the experts handed to the Government on Thursday, March 13, constitutes, together with the comments made by different institutions over the last months, an essential basis for the Government’s final decision, particularly when, despite own nuances that result from the vantage point where the comments are made, there is a general consensus on both the problems in our tax system and the needed solutions.
On 2 July 2013, FAES Foundation published its contribution to this process by launching the “Una reforma fiscal para el crecimiento y el empleo” report. Given the equally prestigious committee of experts chosen by FAES Foundation to produce this report, it is not surprising that the diagnosis and solutions put forward by both committees are broadly in line. Overall, inefficiencies in our tax reform have turned it into a hindrance to economic growth and job creation, which also creates an obvious sufficiency problem that is translated into weak tax collection, despite the fact that our marginal tax rates lead the rankings with out main OECD partners and competitors. The desired equal treatment of the different sources of income does not pass any rigorous analysis of our tax system either.
Having established this general convergence, the time has come for the Government to conclude the process by adopting a reform, the depth of which is, shall we say, the only aspect that remains to be decided, at least with regard to major taxes that constitute the bulk of tax collection. FAES Foundation’s position on this matter is well known. The best tax structure for Spain is one that determines few, low and simple taxes. In this respect, any step toward much reduced taxes and broader tax bases is a step in the right direction. Nonetheless, in order to optimise our tax system, its contribution to economic growth and its collection power, we need implemented measures to be able to significantly alter expectations along with the behaviour of companies and individuals. Only an ambitious reform will be able to do so.
However, the tax reform’s ambition is closely linked to Spain’s ability to keep reducing public spending, which has already reached 47% of GDP. Only an ambitious expenditure-reducing programme that accompanies the tax reform will make it credible and will enable stakeholders to perceive it as a long-lasting reform. It is true that economic recovery will allow enhancing the behaviour of tax revenues, but it is also true that the improvement in the economy’s financing conditions would allow increasing the pace of public deficit reduction without the risk of a downward spiral, as was feared in 2012. The high levels of public debt being reached today in Spain will be paid with taxes tomorrow and, for that reason, as long as we maintain high levels of public deficit that contribute to debt growth, the efficiency of any tax reform could be negatively conditioned since the beginning. Therefore, it is now up to the Government to adopt relevant decisions in order to continue the reform momentum of this term in office. In all events, the fact that tax reduction occupies the place it deserves in the political agenda and that a rigorous and responsible debate on the most appropriate options for our tax system has been held is a positive development.