The race to cut taxes before the elections collides with the criteria of international organizations
Every four years, May comes loaded with election appointments. And it starts even when there are still eight months to go. The rise in prices has become a breeding ground for various communities, even those with no elections in 2023 have started a race to make fiscal promises. But not up, as international organizations point out, or because of the problem of income from public accounts, but down. And in many cases, with a clear regressive component.
Andalucia opened the ban. President Juan Manuel Moreno Bonilla announced a cut in wealth tax, a tribute barely paid by 20,000 Andalusians. In this way, the leader of the PP in Spain’s most populous municipality followed the continuous fiscal battle that the community of Madrid has waged with the central government for two decades. This big announcement was followed by other measures that also affect the revenue of this region, such as the reduction of the lowest level of income tax.
After Andalusia, there was a domino effect in other regions that added to this electoral inertia. Galicia, also governed by the PP, announced an increase in the estate bonus to 50%, up from the current 25%. A few days later, he announced a cut in regional personal income tax to €35,000, a saving of around €46. “It’s less taxes and more welfare,” defended the junta’s president, Alfonso Rueda. In Murcia, another PP-led community has also proposed a reduction in estates.
The Andalusian move threw the central government off balance, which has so far focused its fiscal discourse on packages of anti-inflation measures such as VAT on gas or new taxes on banking and electricity for their extraordinary benefits. The tax reform, the design of which was entrusted to 17 experts a year and a half ago, has remained in the drawer, avoiding tax system projects that were particularly aimed at collecting more and improving progressivity. In response to the influx of tax cuts, the government decided to announce a package of tax measures. Few details of these changes are known, but Finance Minister María Jesús Montero has assured that it will focus on the highest incomes. This is where the proposal for a large wealth tax comes in, for which we need to find an appropriate one, because a wealth tax already exists – at least in some communities – or an increase in personal income tax on capital gains.
The main regional crack in the discourse of the central government occurred in the community of Valencia. President Simo Puig announced on Tuesday the reduction of the regional personal income tax for steps up to 60,000 euros, even though a week earlier he had positioned himself against the tax cuts proposed by the PP barons: “Fiscal disarmament. Not the right way to go in such a crisis.”
Although the aspect of Valencia’s proposal is somewhat different from the rest of the autonomies, it clashes with the position of the central government, which has so far maintained an anti-PP stance on tax cuts. “Every time we talk about cuts, there’s a debate about what should be cut, and this government doesn’t want to cut rights and benefits for the people who need them most in these difficult times,” executive spokeswoman Isabel Rodriguez said Tuesday. The Vice President for Economic Affairs, Nadia Calvino, on Wednesday criticized the right and far-right parties (PP, Ciudadanos and Vox) in Congress that their economic approach is based only on tax cuts by abandoning public services. “If cutting taxes is your only plan, say what you want to cut: health, education or pensions?” – he said.
This situation is contrary to the international trend where signs target the well-known slogan “tax the rich”. Conventional messages from the left that focus on wealth redistribution have emerged in recent months with unexpected allies in that direction, as they did during the pandemic. Since February, states have once again faced a context that requires efforts in public spending, this time to mitigate the effects of price increases. And this, just after the historic shock of the pandemic, which left suffocating levels of over-indebtedness and large imbalances in the public accounts. At the same time, it has undermined basic public services such as health or education.
One of the first major international organizations to warn of this situation was suspected of doing the opposite: the International Monetary Fund (IMF). In the aftermath of the COVID-19 coup, he recommended increased public spending to shore up bankrupt sectors and prevent a disproportionate rise in inequality. The position in which he insisted on war called for more taxes, more progressive, which included taxation of wealth and especially extraordinary profits.
His last major move in this regard was an unusual and harsh rebuke to the UK’s new Conservative government, led by Liz Truss, after an aggressive package of tax cuts sent markets crashing into the pound. An increase in the risk premium as the interest charged on its debt increases. “Given the high inflationary pressures in many countries, including the UK, we do not recommend large, untargeted fiscal packages at this stage, as it is important that fiscal policy does not work against monetary policy.” Furthermore, the nature of UK measures is tentative. to increase inequality,” the IMF said this week.
Central banks decided to tighten monetary policy, raise interest rates in order to “cool” economic activity, damage demand and thereby fight inflation. And they suggest it’s a decision that raises the risk of a recession and is being countered by tax cuts, as the European Central Bank (ECB), the Bank of England and the US Federal Reserve have called for fiscal policy and bailouts. It is aimed at the most vulnerable, those who suffer the most from the increase in the price of electricity, gasoline or mortgage.
That same week, the ECB’s chief economist, Philip Lane, added a “tax for the rich” including “more” (more). Along the same lines, the European Commissioner for the Economy, Paolo Gentiloni, explained on Monday that “we have to be careful with the impact of the VAT cuts, because at the same time we have to support the energy transition or, for example, it is many times more useful to support families and businesses than lower taxes”.
Another major international organization, the OECD, has recently recognized that the international trend is towards higher taxes on the wealthiest people, especially on their real estate. At the same time, he was critical of some fiscal measures implemented against inflation. “Unlike price controls, energy tax cuts do not affect energy providers, who continue to sell their products at market prices and prevent revenue losses. However, tax revenues are immediately reduced and budget costs can be high over time. “For example, the reduction of the VAT rate does not allow for the reduction of the consumer price on the same scale,” the agency emphasizes. Thus, the OECD aims to focus measures on the most “vulnerable” populations. “Innovations in transmission mechanisms may be needed to ensure that the groups most vulnerable to energy price shocks are reached,” the OECD recommends.
Trade unions in Spain have also argued against the tax cuts. At a press conference this Wednesday, the CCOO and UGT announced a calendar of mobilizations to demand higher wages, with both organizations warning of the risks of this drift. “I deeply regret that the country is falling into the conceptual framework that the economic right wanted to place: it’s about tax cuts,” said CCOO Secretary General Unai Sordo. “No tax reduction measure is acceptable in a generalized or permanent manner. It’s a trap, it’s a trap. Today’s tax cuts are tomorrow’s social cuts.”
However, while the government has raised the flag against tax cuts in recent weeks, it has called for cuts of its own. Cutting certain specific taxes on electricity, gas or electricity bills has been a shield the government has used in recent months against those who have accused it of raising taxes because of revenue growth. “We have nothing against it (tax cuts), moreover, we did it from the very first moment, we reduced taxes for a year, comforting families,” assured the first vice-president of the government, Nadia Calvino. Wednesday in Congress.
It is true that Spain has substantially increased its collection this year, to record levels. They are 23,000 million more than the same period last year. However, it should be noted that the packages of measures announced by the government against inflation already amount to more than 16,000 million euros between tax cuts, public transport assistance, fuel cuts or checks for socially vulnerable families, and many of them may be extended after December.
In this context, Spain must manage to reduce the deficit caused by the pandemic and leave it at 5% this year and 3.9% next year in order to get closer to the EU fiscal frameworks, which, although they are now suspended, require the maximum. 3% deviation between income and expenditure in public accounts.
Thus, a sharp drop in income means a problem of accounts, which may lead to a significant adjustment to achieve the balance of the spending side, which is planned for 2025. In addition, Spain already has a structural problem in terms of weight. Tax revenues per GDP. This is called fiscal pressure and is a concept used to compare the systems of different countries. In 2020, the last year reported by Eurostat, Spain’s tax revenue was 36.8%, compared to the EU average of 40%. In almost two weeks, the country has greater fiscal pressure than Spain.
Source: El Diario
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