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Economy

The new tax reform in Spain: fooling us twice

Fernando del Pino Calvo Sotelo

June 25, 2014

The umpteenth change in taxation rules made by this government has the unmistakable imprint of the Spanish legislator, who runs away from simplicity as if it were the plague and turns tax laws into a dangerous path, full of tight curves and hidden traps. But if this were not enough, this latest announcement has the distinctive flavor of the current administration, as you will see.

According to the Ministry of Finance, the goal of this small tax reduction proposal is “to promote job creation, reinforce competitiveness, stimulate growth and favor savings and investment”. I understand that if lowering taxes means all of that, raising them must mean just the opposite. Therefore, the Ministry of Finance is acknowledging that the enormous tax hikes performed by this government during 2011 and 2012 have destroyed employment, harmed our competitiveness, provoked stagnation and damaged savings and investment. This means that those tax hikes have not only become the most flagrant breach of an electoral promise that can I recall, but also, if I may repeat it, that they have provoked more unemployment, less competitiveness, less growth and less savings and investment. The government itself recognizes this. The Minister of Finance himself also stood by the same argument at the end of 2011, just before winning the elections with the repeated promise of lowering taxes, simultaneously getting the job and apparently losing his memory, when he rightly stated that “if we were to raise the most relevant taxes, say income tax or Value Added Tax (VAT), it would bring less growth and more unemployment”. He added that he was critical of EU recommendations (in the sense of raising the VAT) because it would make it more difficult for countries in deep crisis to find their way out, and kept on saying that lowering taxes was the right policy, because “more people have jobs, more people invest, more people save and more businesses open (…), and that’s precisely what brings in more revenues to the State, and what makes public pensions safer and what allows the Welfare State to finance its services”. We must understand, logically, that his raising taxes has caused less jobs, less investment and savings, more businesses closures, and has endangered the public pension system and the services of the Welfare State. It’s crystal clear now.

I will never understand why, when a few weeks later the government decided to raise taxes, the minister laughed: “I laugh because we have puzzled the left” – he said. The supposedly center-right government had surpassed the Communist Party’s proposal of top marginal income tax rate. I don’t know what the left did, but I very much doubt that the voters of the Minister’s party, the most puzzled of all, did laugh at all. A bit later, the Minister had burst out laughing again. One of the leaders of the Socialist Party had publicly aroused the suspicion that the VAT was going to be raised after the regional elections, which were to take place on March 25th 2012. In his response in Congress, the Minister notoriously laughed when he said: “Who’s lying?” He added: “I will say for your peace of mind and the peace of mind of all Spaniards, that after March 25th there will be no rise of the VAT rates”. Who’s lying? – wondered his voters again when he did raise the VAT few months later?

Maybe I should be happy because, apparently, in one or two years’ time this government says it’s going to lower a little bit the very same taxes it previously raised quite a lot, but let me control my enthusiasm. The reason is that all this sound familiar to me. I have the vague feeling that I have lived through this before, like a déjà vu: the same guys promising to lower taxes in the future. The current government, a true champion in shamelessly breaking promises (even by the standards of Spanish politics), makes yet another promise expecting us to forget its track record. It forgets that in any promise, the only relevant issue is the credibility of the one making the promise, and in terms of credibility this government is totally bereft. What has been announced, for sure, is not a reform, but the promise of a reform that does not even bring us back to the tax rates we enjoyed before this government took office. In the best case scenario, Spanish taxpayers will still miss the taxation prevalent in the times of former President Zapatero, and the very fact that in objective terms there might even be one feature of that disastrous administration that one would miss should be worrisome, and rates the current government accordingly.

Maybe this time they are serious, as even a broken clock is right twice a day. But there is a chance that, right after its most gullible voters have cast their votes, the government will break its promise again blaming EU demands, markets shocks or who knows what. Given its track record, guess what it more probable, statistically speaking.

They say that “bad things come flying and good things come limping”. This government is a good example. When it raises taxes, the increase is announced on December 31st and becomes effective on January 1st. When it lowers taxes, it is a promise for one or two years into the future. Tax hikes are live, immediate, real, tangible; tax reductions lie dimly in the distance: they are delayed, chimerical, subject to all sort of “maybe, who knows, could be”.

Last but definitely not least, it is difficult to recall a tax policy as harmful to the rule of law and to any sense of legal certainty as the one we’ve been suffering for the last two and a half years. I don’t know whether it is a question of lack of clarity, of improvisation or of the whims of the legislator, but these constant and arbitrary changes in tax rules cause enormous uncertainty and sense of temporality of all rules, that harm our country for the long term, turning it into an unreliable jurisdiction.

George Bush Sr. won the elections in 1988, as the inheritor of Reagan’s success, promising to lower taxes. He used as the spearhead of his campaign the famous “read my lips: no new taxes”, and lost the reelection because he didn’t live up to his promise. Arguing that the deficit increase hadn’t allow him to do otherwise was of little help. Our current government should take note.

“Fool me once, shame on you; fool me twice, shame on me”. Let’s apply it.

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