The tax agreement sought by ERC – through its pact with the PSC – would generate an annual cost of close to 2.1 billion euros for the financing system, and a recovery loss of around 22.0 billion, according to the most recent estimates. To compensate for the breakdown in accounts, Moncloa will be obliged to accompany the budgetary project with an ambitious package of tax measures. Among the catalog of options already presented as essential, if we want to avoid the bankruptcy of the system, there is the total abolition of the two reduced VAT rateswhich would generate tax revenues “of around 15 billion euros”, according to the estimates of Professor Desiderio Romero Jordán, in his latest article signed for Funcas. This measure will undoubtedly have an effect on basic consumer products, particularly in the food sector, as shown in the Foundation document.
The VAT reform has been languishing in the government’s arms for years without it daring to undertake it. However, the shock which would bring Catalonia out of the common financing regime would force Moncloa not to postpone it further, according to experts like Jordán.
In May 2021, the Minister of Finance, María Jesús Montero, admitted that she was studying the possibility of simplifying the tax, removing the two lower rates. A year later, the team of experts who commissioned the white paper on tax reform approved this option. The Committee opted for a gradual abolition of reduced and super-reduced rates, which could bring revenues to 17.1 billion euros. He also put on the table the possibility of lowering the general rate from 21% to a single rate of 15.4%, as demanded by the Community Executive at the time.
Discounted rates currently apply to food like milk, cheese and eggs, drugs for human use, prosthesis, officially protected housing or vehicles for people with reduced mobility.
This is not the only way for the government to make up for the loss of revenue resulting from Catalonia’s exit from the common tax system. The Treasury has room to increase the last two sections of the personal income tax, which tax income above 60,000 euros. The Fedea insisted a few weeks ago that the transfer of the management of 100% of taxes to the Generalitat would require the executive branch to increase the state income tax bracket from 29.5%result of the void that Catalonia’s exit from the current system would leave. On the contrary, if an extraordinary source of revenue is not opened, the remainder of the LACC would cease to receive 10.7% of funding, which would deplete public services. The blow would be more serious if other regions required a similar model. According to De la Fuente, only if Madrid and the Balearic Islands followed in Catalonia’s footsteps and demanded the management of all taxes, the state would lose an additional 37.5 billion euros in tax revenue. The cost could rise to 62 billion if the measure were extended to all communities in the common system.
Everything will depend on the details of the application of the agreement with ERC – which remain confidential – and the evolution of the reform of the regional financing model, which Sánchez has already started to discuss bilaterally with the regional presidents. With the information available, everything points – according to Fedea – towards an annual transfer of between 6,600 and 13,200 million euros from the common State treasury to the Catalan Treasury, which would increase the homogeneous financing of the Generalitat between 25% and 50%. “If no community can lose its funding, the state will have to adjust its spending downward, by reducing benefits that fall within its jurisdiction, such as pensions or defense, or by increasing, now or in the future, the pressure tax”, insists Ángel de la Source. .
The bet of the golden mean
The debate on VAT, however, goes beyond Catalonia. The European Commission published – at the end of last March – a report on the vulnerabilities of the Spanish economy. In this document, those of von der Leyen recommended combining the abolition of the two reduced VAT rates, with an increase in green taxes amounting to 15 billion, and the abolition of the tax advantages approved so far. The Treasury responded to the document by approving the minimum rate of 15% in companies and the extension of extraordinary taxes on banks, energy and large fortunes. However, the impact of these three budgetary adjustments on revenue is limited, and Brussels is hoping for a more solid reform.
Having already announced the gradual withdrawal of the main tax aid measures, the Government must continue to comply with the scenario developed by the European body. To do this, Moncloa could opt for an intermediate option and remove only the reduced VAT rate (10%), leaving the rest intact. This would add 11.775 million euros to the collection, according to tax experts. If necessary, the white paper on tax reform recommends that the Executive put in place a system to offset the effect of rising prices for households with the lowest incomes, through direct aid or surgical tax advantages intended low income. Sumar has been proposing these for some time, such as capping the price of the basic shopping basket, which the socialist wing of the government excludes.
But the emergence of the inflationary crisis has clarified this idea which, with a CPI advanced to 1.5%, could once again enter the imagination of the Treasury. In fact, both Fedea and the General Council of Economists (CGE) consider it necessary to include the simplification of VAT in the tax reform demanded by the European Commission, in exchange for the disbursement of what remains of the VAT. New generation. The two entities have been calling for months for the elimination of reduced rates and the module system, giving priority to environmental taxes that contribute to the energy transition and placing emphasis on the fight against tax fraud.
However, a simplification of VAT would have significant effects on consumption, at a time when the economy hopes to be able to count on it to continue its growth in the medium term. In addition to the foreseeable increase in the price of basic products included in the reduced rates, there is the increase that could be generated on housing, also taxed at 10%.
The constant tension experienced by the real estate market makes it inadvisable to implement this measure, as long as it is not accompanied by at least temporary compensation measures. The purchase and sale of housing – which is listed at a reduced rate – would suffer a further increase in their cost. While the Executive and the PP compete with each other through measures aimed at reducing prices through market intervention or an increase in supply, an increase in VAT would harden – even more – the possibilities of access to accommodation. The same would apply to passenger transport, hospitality services or property renovation work. The impact will be greater on the price of medicines, or on products and services intended for people with disabilities or reduced mobility; all taxed at the super-reduced rate of 4%. However, in general, experts assure that the tax advantage provided by the two reduced rates favors more citizens with more resources, “55% of the tax gain represented by the reduced rates is concentrated in 40% of the most rich,” he emphasizes. the team led by Jesús Ruiz-Huerta.
Spain, the second EU country that taxes the most products at reduced rates
Spain applies reduced or super-reduced rates to 33 product categories, a figure exceeded only by Italy’s 35. In the European Union, with the exception of Denmark which applies a single tax rate of 25%, all countries have several reduced rates. According to AIReF, Spain taxes food, health, leisure, culture and catering at significantly lower tax rates than its European partners (notably the supply of alcoholic beverages), which represent a substantial share of household spending; while the differences with other countries are not so great when it comes to hospitality and transportation. The latest estimates – prepared by López Laborda, Marín and Onrubia in 2018 – put the average cost of collection at 17.1 billion euros, only for households: 5.3 billion for the application of the 4% rate and 11.8 billion for the application of the 10% rate.
