Experts’ tax reform languishes amid anti-inflation “patches”

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The committee of experts for tax reform prepared a year ago a guide to move towards a simpler, greener and more progressive tax system, but the need to tackle inflation has resulted in a series of general measures and “patches” that distance and even contradict its recommendations.

The professors and members of the committee of experts Violeta Ruiz Almendral and Xavier Labandeira agree, in statements to EFE, that the Government has done little follow-up to their report, although some of their proposals would have been very useful in a context of high prices such as the one experienced last year.

The escalation of prices “did not recommend the immediate application of the proposals in the energy-environmental field,” Labandeira admits in reference to the recommendation to raise fuel taxation, but points out that there were ideas “especially valid to promote energy saving and efficiency” that have not been followed.

Instead of moving towards these savings to guarantee energy security, “the response was the opposite, with the generalized subsidy to the consumption of automotive fuels,” he adds, which does not encourage environmental improvement and involves a huge cost.

“The Government has not followed the central elements of the white paper,” stresses Ruiz Almendral, and gives as an example the VAT reductions for electricity or food, when reduced rates are precisely one of the “holes” of the system that the report urged to correct – it advocated abolishing the reduced VAT rates in exchange for a lower general one.

The single VAT rate was part of a set of proposals aimed at simplifying the system through the elimination of bonuses and exemptions in various taxes that would be complemented by transfers for vulnerable groups to compensate for this higher tax burden.

“The compensatory strategies defended in the white paper could have been adopted: not linked to energy consumption and limited to vulnerable groups,” says Labandeira, in line with the help of 200 euros, but “more stable over time,” agrees Ruiz Almendral.

However, Funcas researcher Desiderio Romero argues that despite the urgency of simplifying taxes such as personal income tax or corporations, an environment of uncertainty such as the current one “is not the most appropriate time” for a comprehensive reform.

. PLEJIDAD AND “PATCHING”

Beyond concrete measures, the “change of philosophy” defended by the white paper has not penetrated fiscal policy, since the creation of three temporary and extraordinary taxes – for banking, energy and large fortunes – is a new “patch”, according to Ruiz Almendral, a formula “socially accepted” to increase collection that avoids facing real problems.

In the case of the solidarity tax for large fortunes, the formula adopted is “technically criticizable” for the professor, who recalls that the wealth tax is state and the Government could have established a common minimum for all regions as proposed in the white paper instead of creating a “parallel tax”.

The measures adopted in the last year “are introducing more complexity” into the system, agrees Romero, who adds that “the spirit of the reform is not being applied” because “a temporary tax is not the most appropriate.”

TAX REFORM IN THE AIR

The tax reform was one of the great economic objectives of the Government and for its elaboration it commissioned a report to a committee of experts that was presented in the form of a white paper on March 3, 2022, just a week after the Russian invasion of Ukraine and with energy prices skyrocketing.

The context thus conditioned the future of the document – which in its almost 800 pages presented an exhaustive diagnosis of the problems of the Spanish tax system along with more than a hundred proposals for improvement – and of the tax reform itself.

The Minister of Finance, María Jesús Montero, already ruled out in the presentation any short-term tax increase, thus cooling expectations around the tax reform committed to Brussels, which after a convulsive 2022 has been reduced to a few measures.

Montero argues that the Government’s fiscal policy is aligned with what is committed to Brussels, since it advances in progressivity (with higher taxation for capital income and a reduction in personal income tax for low incomes) and small advances in environmental taxation, such as the new taxes for waste and single-use plastics.

The experts recognize the contributions, but are pessimistic about the future: “A reform is impossible” in an election year, ditches Romero, who recalls that traditionally the reports of experts remain as an “exercise in reflection” because “governments do not make comprehensive reforms, but patching.”

“It is never the time to raise taxes,” Ruiz Almendral ironically says, due to the generalization of “the idea without scientific basis that raising taxes reduces growth,” although he is confident that the analysis of the system carried out by the report can serve for the future.

Labandeira, for its part, urges to resume the energy-environmental proposals to advance in the ecological transition, for example with incentives in the registration tax, a reform pointed out by the Government in a recent report sent to Brussels, although the Treasury rules out that its implementation is planned.

The reform of environmental taxation, one of the areas in which Spain is most decoupled from the European Union, has been left in the air – with measures ranging from equating the taxation of diesel to a tax for airline tickets – as well as the imposition of a common minimum for inheritance tax or the single VAT rate.

But the white paper not only addressed large taxes, but also urged to solve small imbalances in the system, for example by exempting from taxation collaborative economy activities that in practice nobody declares, such as shared transport or housing exchange, and that also continue to wait.

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