Spanish Tax Increase Would Doom Economy

Spain’s new Prime Minister, Pedro Sánchez, formally unveiled his plan to make the country more “inclusive” in a speech to the Spanish Congress on Tuesday. 

Sánchez’s plan is to increase spending and finance it by raising taxes on businesses and high-income individuals. The Spanish Congress should block the prime minister’s proposals if it wants to avoid an exodus of capital, as well as higher unemployment and prolonged stagnation.

These proposals come at a time when Spain is already above the maximum budget deficit of 3 percent of GDP set by the European Union. 

Sánchez proposed to increase old-age pensions at a faster rate, implement a minimum basic income for low-income citizens, increase unemployment benefits, expand, and make mandatory paid leave for mothers and fathers, and hire more public workers. These measures would discourage work and solidify the culture of dependency on the state. 

Handing out a basic income only to those who earn below a certain level would keep them in low-paying jobs since pay raises or new jobs would end their subsidies. More generous unemployment benefits would encourage workers to be fired by employers and the unemployed to stay jobless. 

On the other hand, raising wages and hiring more public workers would make more people want to switch to the public sector without reducing unemployment. An International Monetary Fund study in 2013 found that increases in public employment fully crowd out private employment, meaning that for every new public worker one worker exits the private sector.

Additionally, forcing parents to take paid leave would encourage employers to hire childbearing-age employees as temporary workers to avoid giving them paid leave.

Since government programs are not free, the Prime Minister plans to cover the cost of his proposals through tax increases. Sánchez wants to eliminate the cap on taxable income subject to social security taxes, increase the top income tax rate from 45 percent to 52 percent, and raise taxes on capital gains from 20 percent to 30 percent. He proposes requiring corporations to pay at least 15 percent of their global income in corporate tax, a “Google tax” of 3 percent on the sale of digital services of large companies, and an 8 percent surtax on financial institutions’ income.

Even though the government plans to finance its proposals through tax increases, the revenues would be small if not negative for government coffers, resulting in a net increase in the budget deficit. Applying the 36 percent Social Security tax to all wages and increasing the top income tax rate would drastically reduce the incentive to work for those who earn above the current cap and entice the rich to move abroad. 

In Spain, as is the case elsewhere in the EU, high-income individuals can easily move since all Spanish citizens are also citizens of the EU. This gives them the right to live, work, and pay taxes in any EU country, without paying taxes in their country of birth. Consequently, millionaires could move and stop paying taxes in Spain at any moment if taxes increase.

France experimented with this type of proposal when it raised the top income tax rate to 75 percent in 2012. As a result, soccer players, actors, and businessmen moved to neighboring Belgium to avoid the tax, forcing the French government to repeal the tax in 2015. Since Sánchez’s proposal would raise the top marginal tax on income to 70 percent, it is likely that many famous soccer players such as Lionel Messi and Sergio Ramos would leave Spain.

Furthermore, a minimum 15 percent tax on the global income of companies would discourage multinationals from investing in Spain. On top of this, a tax on digital services and a surtax on financial institutions could result in Google and international banks exiting the country, leaving tens of thousands unemployed.

Rather than raising the cost of hiring, the government should encourage job creation and wealth. Spain is still in bad economic shape due to its high debt and government spending. Debt of all government levels represents 115 percent of GDP or $44,000 per citizen, and government spending represents 42 percent of GDP or $16,000 per citizen. Additionally, 1 in 6 Spaniards in the labor force is unemployed and there are more people who receive government pensions, are unemployed, or work for the government than there are workers in the private sector.

Luckily, Sánchez’s Social-Democrat party holds only 85 out of 350 seats, and his radical socialist ally, Podemos, controls 71 seats. The only way for the Prime Minister’s measures to be approved would be to get support from all leftist regionalist and separatist parties and one right-wing regionalist party if the center-right opposition stays united.

Spaniards need and want to work in high-paying jobs. Prime Minister Sánchez’s measures would sentence Spaniards to joblessness and state dependency, while emptying the state coffers when millionaires and soccer players leave. Spanish congressmen would be wise to reject the new proposals. 

Read the Spanish version of this article here

Daniel Di Martino is a contributor to Economics 21. Follow him on Twitter @DanielDiMartino

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