The president and general director of the IEE, Íñigo Fernández de Mesa and Gregorio Izquierdo, respectively, have released for the second consecutive year in Spain the report prepared by the Tax Foundation of the United States on the Tax Competitiveness Index (ICF). The report puts the tax plans of OECD countries into perspective by measuring the competitiveness of their respective tax systems. The ICF allows, therefore, to compare the design of the tax regulations of developed economies, revealing which countries have a more efficient and growth-enhancing system and showing which demarcations suffer from a more obstructionist model that hinders development and socioeconomic progress, among which, unfortunately, Spain increasingly stands out.
Thus, in the ICF, Spain is in position 27 of the total of the 36 countries analyzed in 2020, four places lower than the position 23 it occupied in 2019, which shows a notable loss of fiscal competitiveness in our country , which was already in lagging positions in the international environment. And the worst thing is that, if the announced tax increases are carried out, along with those already made, that position will fall even more.
Gross tax pressure metrics provide a myopic view of the situation of the different tax systems globally, as it suffers from several limitations. Furthermore, due to its measurement implications, it tends to erroneously skew the perception of the tax burden borne by Spanish citizens and companies with respect to our comparative environment. In order to carry out a more realistic analysis of the true fiscal burden that a tax system supposes, at least three elements must be complemented: the levels of the underground economy, the effort related to the income levels of the population, and the level of competitiveness. and neutrality.
For this third factor, in addition to the Competitiveness Index of the Tax Foundation, the IEE elaborates the Indicator of Regulatory Fiscal Pressure (NFP), based precisely on said index, to estimate the burden that the design of the tax system introduces in the economies in comparative terms .
The effective tax pressure (adjusted for the shadow economy) and the fiscal effort equates us to Europe
The underground economy results in a tax overload for those who do comply with the fiscal rules and distorts the tax pressure ratio, since an estimate of the underground economy is included in GDP (denominator of the tax pressure ratio). As the shadow economy estimated in Spain is higher than that of the EU as a whole (22% vs 13%, respectively according to the IMF), the gross tax pressure ratio seems optically low in our country (which is not the case).
When this aspect is corrected, using GDP as a reference without taking into account the contribution of the underground economy, it is observed that the effective fiscal pressure of Spain is very similar to that of the average of the European Union (44.5% vs 45 %, respectively). In fact, the effective tax burden of the European Union and Spain are high in international comparisons and notably higher than that of other OECD countries, such as the United States, Japan, Switzerland, South Korea, Australia, New Zealand or Canada, most of them with effective fiscal pressures lower than ours by more than 10 points.
Therefore, our challenge is to reduce the shadow economy to increase collection, which goes both to improve efficiency in the fight against tax fraud, and to bet on more reasonable tax systems for taxpayers that increase the opportunity cost of operating in the shadow economy, a trend that increases, not only with the level of tax rates, but also in times of economic crisis such as the current one.
For its part, the fiscal effort makes it possible to compare the burden that a tax system imposes on its taxpayers in relation to their income, since it is calculated as the relationship between the tax burden and the per capita GDP of each country. Spain makes a fiscal effort 6.6% higher than that of the European Union, which is already quite high in the international context, well above that of other OECD countries. Among the large advanced economies, only Italy presents a fiscal effort higher than that of our country.
The regulatory tax burden is also comparatively more damaging for Spain
A competitive and neutral tax system promotes higher levels of economic growth and investment, while an uncompetitive, inefficient and distorting one harms them. Understanding by competitive the maintenance of marginal rates at low levels, and, understanding by neutral, the ability to channel the collection with the least degree of distortions possible on the decisions of the agents and with rules that are of clear, simple and general. This is what the Normative Tax Pressure Indicator, prepared by the IEE based on the Tax Foundation's Tax Competitiveness Index, intends to measure.
The regulatory tax burden for Spain stands at 110.5 points, that is, it is 10.5% higher than the EU average, and also higher than 108.1 points in 2019, which shows a certain deterioration of fiscal competitiveness in the last year. This worsening is also reflected in the decrease from position 23 to 27 (of the 36 countries analyzed), in terms of a higher regulatory tax burden. Spain's situation is also 9.4% worse than the average for OECD countries, and far from the top positions occupied by Estonia, Latvia and New Zealand.
The tax burden for companies is very high regardless of the indicator used
The gross corporate tax burden, even with all its limitations as an indicator, is significantly higher in Spain than in the European Union as a whole, reaching 11.1% of GDP in Spain in 2018 compared to 9.6% in the EU . If, in addition, the adjustment is made for the weight of the underground economy, it is obtained that the differences with Europe in the corporate tax burden are even greater, with an effective burden borne by Spanish companies of 14.2% of GDP, the seventh largest of the countries analyzed and higher by more than 3 points than the EU (11.1%).
If the general regulatory tax burden in Spain is already much higher than our peers, in which case of the regulatory tax burden on Corporation Tax, the gap is even greater: the Regulatory Tax Pressure on IS is 22.6% higher than the European Union average, and 15.8% higher than the OECD average. Again, there has been a noticeable deterioration compared to the results of 2019, where Spain showed a regulatory tax burden on Corporation Tax 16% higher than that of the European Union, and its place in the ranking has dropped from the position 22 to position 28, out of 36 countries analyzed (OECD).
In the area of property taxation, Spain's situation is even more onerous, if possible, and it has one of the weakest competitive positions in this area (presenting the second worst result, only behind Italy, of the 36 countries analyzed). Specifically, the regulatory tax burden on wealth taxation in Spain is 40.9% worse than that of the EU, and 39% less competitive than the OECD average.
For its part, the tax wedge, which measures the difference between the labor cost of having a hired worker and the final net salary received by said worker, stands in Spain at 39.5% in 2019, or, In other words, the net salary that the employee finally receives constitutes 60.5% of the labor cost. Spain is clearly above the OECD average, which is 36.0%, in position 15 out of 36 analyzed.
The tax wedge is calculated as the percentage of the labor cost that the withholdings on the income from work that are destined for the Income Tax and, in addition, the Social Security contributions (both those paid by the company and the paid by the worker). Of these three elements, the largest tax wedge in Spain is explained by the social contributions paid by companies, which are significantly higher in our country (it is the seventh country with this highest cost), while Spain is among the countries with lower income taxes and social contributions paid by the worker, in terms of gross salary, than the OECD average.
This implies higher labor costs for companies, which causes a deterioration in the competitiveness of the economy and has a negative impact on job creation. Estimates suggest that the elasticity of employment with respect to labor cost is -0.37, that is to say: an increase in labor cost of 1% translates into a reduction of -0.37% in employment.
Regarding the argument of tax progressivity: it is already very high in Spain in relation to our comparative environment
Spain ranks, according to the progressivity indicator prepared by the IEE based on the OECD analysis, among the countries where income tax is more progressive (117.1). Specifically, in eighth place out of a total of twenty-two analyzed, exceeding both the EU average (100) and the OECD average (111.4). Thus, according to this indicator, in Spain income tax is 17% more progressive than the EU average.
This greater progressiveness in Spain should be taken into account when modifying the structure of personal income tax, since the alleged improvements in equity must be balanced with respect to economic efficiency criteria. The tax discrimination that implies a very accentuated progressivity in the highest income brackets penalizes the attraction and retention of talent and the most productive human capital, which can be transferred to other countries with less taxation (movement that is now very accessible due to the majority possibility of teleworking that grants greater freedom in the provision of services).
IEE recommendations: There is nothing more inopportune in the current situation than raising taxes
Raising taxes in a context of recession such as the current one is especially inappropriate and counterproductive, since it would delay, if not make impossible, the possibilities of economic recovery in our country. The tax increases depress the productive supply and consumption, just the opposite of what the Spanish economy requires, and deteriorate the expectations of the agents, causing a deterioration in confidence, which is the fundamental pillar on which to support the recovery. It is no coincidence that the response to the COVID-19 pandemic in some of the main OECD economies, such as Germany, France, Italy or the United States, has been marked by the tendency to reduce the level of taxes, except in Spain. which begins to be an exception within its environment.
As shown in the report, the arguments that are usually used to justify tax increases in Spain distort the true tax burden that these agents bear. Neither is the tax burden low when it is adjusted for the levels of the underground economy or for the level of income, or when inefficiencies and distortions of the tax system are incorporated through the regulatory tax burden; Nor do companies pay few taxes, as they bear a tax burden higher than the average for our environment compared to any of the indicators used; Nor do large wealth and income contribute little: the former bear a regulatory tax burden that is practically unparalleled in advanced economies, while with respect to the latter, they are subject to progressivity that is one of the highest with respect to the main countries. of our environment.
Looking ahead, and once we have left the current crisis behind, it is a priority to recover the sustainability of our public finances, which must occur through containment and improvement of spending efficiency and never through tax increases that compromise growth and, therefore, the budgetary consolidation itself. At a time of deep crisis like the present, and even more so in an open economy with mobility of factors such as Spain, the only way to sustainably increase our tax collection is to favor the recovery of activity. For this, our objective should be to have a competitive and homologated taxation with our environment to favor activity, business investment and employment, which passes by mitigating our excessive taxation of capital in general and on the company in particular, which is fair the opposite of what is wrongly and inopportunely posed.
