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Documento – Madrid, marzo 2022

A tax reform that boosts competitiveness

From the Círculo de Empresarios, it has always been advocated that fiscal policy should favor economic growth and competitiveness, encourage savings and investment, promote economic freedom, and not hinder business initiative and citizens' prosperity. This requires multi-year budget planning that provides a predictable medium-term framework and, taking into account taxpayers' ability to pay, establishes the necessary level of expenditure under criteria of maximum efficiency in the use of public resources and determines the revenues required to finance it.

In the current political and economic context, marked by high uncertainty due to the implications of Russia's invasion of Ukraine and an incomplete recovery in Spain, with inflation at high levels, a significant public deficit, and high levels of debt, any reasonable fiscal policy must include a medium-term public budget rebalancing plan. The correction should be carried out through a reduction in unproductive public spending, following a determined evaluation of its efficiency, rather than through an increase in public revenues that would lead to greater fiscal pressure and, consequently, a tax burden difficult to bear given the current per capita income level.

The pending modernization of the tax system must be guided by the general principles of taxation: neutrality, predictability, and simplicity, ensuring that its design takes into account the country's socio-economic reality, as well as the principle of tax co-responsibility in spending decisions and their implications on revenues. The tax system must be simple, transparent, efficient, and stable, to promote equity, the consolidation of public accounts, and also neutrality, to avoid or minimize distortions caused by the introduction of new taxes or the increase of existing ones, or under the principle of "polluter pays" in the case of environmental taxation.

A tax system reform must evaluate in advance its potential impact on the fiscal autonomy and budgetary stability of territorial administrations and ensure market unity by avoiding regulatory dispersion, overlaps, or double taxation between different administrative levels. At the same time, it must consider that frequent changes and the creation of new tax figures to increase revenue seriously harm the productivity and competitiveness of the Spanish economy.

The fact that the resolution creating the expert committee to draft the White Paper on tax reform proposes progressively aligning tax revenues with the average of EU member states has led the Círculo de Empresarios to conduct a comparative analysis of taxation by economic function. This analysis shows that Spain's revenue-to-GDP gap compared to the EU-27 is not due to lower tax rates but rather to a smaller number of taxpayers, due to a high unemployment rate, the presence of a significant underground economy, and a tax system with a higher degree of progressivity than neighboring countries. Increasing fiscal pressure will have the opposite effect to what is intended: it will create additional obstacles to job creation and further expand the underground economy. A fiscal effort comparison shows that Spain's burden is higher than that of the EU-27, which does not justify a tax increase.

In the area of labor income taxation, before considering possible increases in marginal rates, the focus should be on job creation to expand the number of taxable bases. Additionally, it is necessary to reduce employer social security contributions, which are higher than those in the EU-27, to enhance competitiveness and eliminate entry barriers to the labor market. Regarding wealth and capital income taxation, it is not advisable to maintain tax figures that do not exist in the rest of Europe or are merely residual. This suggests eliminating the wealth tax and maintaining the inheritance and gift tax with broad exemptions for direct transfers, particularly to ensure business succession and avoid penalizing savings and investment to prevent their relocation.

Regarding consumption taxation, the VAT system should be simplified, and tax rates reassigned, considering the productive structure and its potential economic and social impact, as well as eliminating restrictions that limit investments. Revenue collection can be increased by intensifying the fight against fraud and the underground economy. In environmental taxation, it must be emphasized that its purpose should not be to generate revenue but to discourage environmental impact under the principle that "the polluter pays."

At this time, tax increases should not be proposed. Fiscal harmonization among tax figures and rates should not be carried out between Spanish administrations but rather among European administrations based on technical and rational criteria that foster healthy tax competition. Moreover, it is essential to coordinate changes in corporate and environmental taxation at the international level with a high degree of consensus to ensure their revenue impact and avoid competitive distortions and tax base relocations. This means that the government must define its position in advance based on the interests of the Spanish economy and its businesses and defend them adequately in international negotiations.

Modernizing the tax system implicitly involves improving the efficiency of public administrations and their relationship with taxpayers so that they appreciate the quality of public services received in exchange for their taxes. The Círculo de Empresarios once again advocates for promoting cooperation between the tax administration and taxpayers, using clear and comprehensible language, simplifying procedures to reduce compliance burdens, and accelerating dispute resolution through administrative and judicial channels with alternative resolution mechanisms such as arbitration and mediation.

Madrid, March 14, 2022