The Spanish government has approved another ‘temporary’ Wealth Tax on ‘big fortunes’ that is more about politics than economics, and likely to be counter-productive.

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By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Abogados
8th of December 2022

Introduction

Spain is different.

In order to better understand why Spain would approve a second Wealth Tax, I need to preface this article with a political digression on how we got here in the first place because this new tax is being introduced solely for political reasons, serving no other purpose.

Politics, always the politics

As frequent readers will recall, Spain already has in place another ‘temporary’ (read permanent) Wealth Tax, control over which was devolved to Spain’s 17 autonomous regions. This tax was once suppressed, and then reinstated again by a socialist government and applies nationwide (Impuesto de Patrimonio). Being a devolved tax Spanish regions have leeway to make adjustments as they see fit to the point of even suppressing the Wealth Tax.

In broad strokes, Spain is traditionally split into two ideological camps like many other countries:

1. Left-wing parties that favour higher taxes to finance the needs of an ever-expanding public administration, and increasing public expenditure to finance more services (health, education, etc).

2. Right-wing parties that favour low taxation and a slim but efficient public sector to dynamize the economy and increase employment.

These two opposing camps often clash on administrative and tax matters and coalesce on implementing different tax measures, depending on which side is ruling at any given moment.

Spain is now ruled at a national level by a coalition government of socialists and communists whose self-declared goal is to increase the fiscal pressure on taxpayers, which brings us to the new tax this article is about (known as ITSGF for short, explained below) to prop up an ever-growing public sector.

As I’ve already mentioned, Spain’s autonomous regions are run by governments of different political stripes. In the regions where centre-right parties have been elected like Madrid, Andalusia, and Galicia, they have put in practice (to great success) liberal fiscal policies that reduce taxation, even going so far as to suppress some taxes altogether like the original Wealth tax.

In these three liberal regions, as I have painstakingly recorded over the years through multiple articles, the economic phenomenon of Laffer’s curve can be observed. In a nutshell, this economic theory (penned by US economist Mr. Arthur Laffer) says that a tax reduction can actually increases tax revenue up to a certain marginal revenue point (only if supplemented by other measures, such as a reduction of public expenditure).

These regions have de facto suppressed both the Wealth Tax and Inheritance Tax, amongst many other tax instruments, as I’ve reported in several articles over the years:

• Andalusia to abolish inheritance tax in 2019 – 29th January 2019
• Andalusia, now a tier 1 region for low taxation in Spain -8^th July 2019
• Andalusia effectively abolishes the ‘Wealth Tax’ in the region – 19^th September 2022

The liberal fiscal policy pursued by these three regions has triggered strong economic growth with welcome consequences in those regions. Besides a notable increase in tax revenue, the unemployment rate has fallen, and foreign investment has increased. This resounding success is in stark contrast to the rest of Spain where economic policy has strangled the economy through higher taxation, fostering huge levels of unemployment.

Despite the success of liberal regions, the national government in Madrid has decided to enact a ‘new’ (second) Wealth Tax to quash the fiscal competencies of liberal regions under the cover of harmonising (read equalizing) the fiscal policy nationwide to avoid what they label as ‘unfair’ competition and fiscal dumping (Spanish anglicized made up word).

The frustrating thing is that all regions in Spain have the same freedom to pursue such liberal policies if they want to, prompting economic success on its wake, but they purposely deny themselves such an option because of their own ideology, which drags down their regional economies.

For example, take the case of Catalonia. This is one of Spain’s industrial and financial powerhouses whose rightful place should be at the forefront of the economy. However, the regional government has held the economy back through a series of misguided policies that reduce incentives for local companies to create jobs, and deter foreign investment. Take, for example Barcelona’s hostility to foreign property-investors.  

In a nutshell, the purpose sought by our government in Madrid through this new tax bill is primarily to exert control, negating all the successful fiscal policies lawfully passed by these three liberal regions freely exercising their constitutional rights, and bring them to heel in line with the rest of Spain’s (failing) regions under the government’s direct control.

This will no doubt have serious repercussions for the Spanish economy, because Madrid is Spain’s financial powerhouse. If you mess up Madrid’s economy, the country will hurt (badly).

New solidarity tax on the rich (impuesto temporal de solidaridad a las grandes fortunas, or ITSGF for short)

The instrument for this policy is a new ‘Temporary Solidarity Tax on Big Fortunes’ (known for short by its Spanish initials ITSGF) to be enacted on or before the 31^st of December 2022 with retroactive effects to the 1^st of January 2022. In other words, it covers all of the tax year 2022.

Its goal is to collect 1.5 billion euros a year from the ‘super rich’ (personally I’d call it a win if it even manages to rake in 300 million euros). As you can see from the wealth tranches below, it doesn’t take billions to be considered ‘super rich’ in Spain.

The ITSGF is divided into three tranches:

• €3,000,000 to €5,300,000 – 1.7%
• €5,300,001 to €10,600,000 – 2.1%
• Over €10,600,001 – 3.5%

In practice, taxpayers have a minimum allowance of €700,000, so the above figures must take this into account, besides other personal tax allowance like a main home.

Unconstitutional

As mentioned above, the Wealth Tax was devolved to Spain’s 17 regions, as enshrined in Spain’s Constitution of 1978. It is no longer a (tax) competency held by Spain’s central government. The ITSGF in effect encroaches on a legal competency that was assigned to regional tax authorities and is constitutionally enshrined.

In other words, the central government has no business with the Wealth Tax, which is a matter for the regions, but that has not stopped it interfering with a new Wealth Tax dressed up as a ‘Solidarity Tax’ to gain an advantage over its political rivals by cornering them and negating their (economic) success.

Moreover, it is one of our general tax principles that you cannot be taxed twice for the same thing. It stands to reason that introducing a second tax that taxes exactly the same thing is unconstitutional and can – and should – be legally challenged at court.

Under normal circumstances, I can safely say this new politically motivated tax would be quashed by Spain’s Constitutional Court for self-evident reasons.

However, we are not living under ‘normal’ circumstances. We have a Spanish President whose pursuit of power has led him to ‘colonize’ all independent democratic institutions in the country by appointing his own people, which includes tarnishing the prestige and independence of the Constitutional Court itself by promoting two allies who give the government a majority of vote in this court. Therefore, the outcome of this law being repealed is uncertain, at best.

Impact on the overall economy

In short, negative.

This could prompt an exodus of affluent taxpayers, who will relocate to neighbouring states with low taxation, such as Portugal and Andorra. This will enable them to mitigate their tax bill, within the law.

It will also disincentivize foreign investments in Spain. At a time when Andalusia (but also Madrid and Galicia) were attracting substantial foreign investments that translated into the creation of jobs and higher tax revenues, this new tax will throw a spanner in the works, dampening the business mood.

This new tax is – clearly – politically motivated having no economic or legal logic to it, to put it mildly. In fact, we can credit our President Mr Sanchez as the creator of political taxes that serve no discernible purpose other than to create a political advantage of sorts; even if it’s at the expense of the whole country.

Podemos, the pro-Russian, hard-left junior partner of the socialist government, has basically pushed for this law to be passed if Mr. Pedro Sanchez wants to secure their political backing in the new upcoming national elections in 2023.

But ultimately, it’s not even about this tax.

It’s about taking away the freedom and (tax) competency of autonomous regions and placing them under the control of a central government that seeks to quash any and all dissension and freedom, ‘equalizing us all’. Ironically, Mr. Pedro Sanchez is acting much as General Franco did under his loathsome four-decade dictatorship, killing freedom.

Spain’s future is bleak

An economic meteorite is heading towards Spain in the shape of a ballooning public debt (€1.5 trillion) and soaring interest rates.

Unless decisive action is taken, either by the EU, or by a new government that adopts sensible economic policies such as lowering taxes and reducing public expenditure, Spain could find itself in a very delicate situation where it has difficulty borrowing and/or even repaying the (high) interests of its public debt. If, on top of this, its credit-rating takes a tumble, like it did during 2011-2013, it could push the country over the edge.

I get how most politicians are not economists and tend to overspend and overpromise with an eye on poll day. I really get it, it’s part of the game we call democracy.

However, when the ambitions of the few threaten the welfare of the many, we need to put checks and balances in place. And that onus, I’m afraid, now falls on our EU Overlords to rein in the exuberant excesses of our deluded political class.

For it is clear Spanish politicians are not up to the task, and their complacency blinds them from stepping up and taking responsibility for our economic future. Short-sighted career politicians who take decisions on the hoof, based on short-term opinion polls, are a nuisance under normal circumstances, but they can become a big liability when the economy slows down and is derailed by high inflation.

Next year we have general elections in Spain, so our government is in overdrive hyping all sort of promises and financial commitments to secure votes and political allies across the left of the political spectrum. Foremost amongst the government’s main objectives, in view of the general elections, is to bring down unemployment (13%, the highest out of any OECD country, that’s out of 38 member countries) that most affects collectives such as women and young adults. To ‘massage’ the high unemployment figures, which don’t reflect well in polls, the government has been busy hiring public-sector workers at full throttle using public money, and EU money.

A few key figures to keep on mind on where Spain is heading next economically:

• 80% of all new jobs created in Spain have been in Spain’s (bloated) public sector, fostered by the government.
• On average, the wages in the public sector are 70% higher than those in the private sector.
• Over 75% of the much-vaunted EU’s NextGen funds have been allocated to public administrations! In other words, they have not reached SMEs (which constitute 90% of Spain’s productive industry) nor millions of ailing Spanish families who (literally) cannot afford high energy bills and struggle to make ends meet every month.
• Spain’s fiscal pressure is 27% higher by comparison to fellow EU countries.
• Spain spends over 300 billion euros a year in pensions and civil servants' wages. In 2005 civil servants' wages were 7.5% of GDP, now in 2022 they are almost 13% (its almost doubled).
• Over 300 companies a day are filing for creditor protection in Spain (the highest figure on record, even surpassing that of 2011-2013 when Spain almost defaulted on repaying its high interests and was on the brink of being bailed out by the EU as the country’s credit-rating took a plunge) which means thousands of workers are losing their jobs every day.
• And last but not least the most severe one: Spain’s public debt has ballooned by over 30% under the incumbent, to a staggering record-breaking 1.5 trillion euros (€1,500,000,000,000). That’s over 133% to GDP of debt! Every day another 300 million euros is piled into this debt. This is by a long shot the most serious figure of all.

So basically, what our government is doing is ploughing forward with blinkers on, over-indebting the country, and using all that borrowed money to hire yet even more civil servants with an eye on the next general election. In the words of Oscar Wilde: “The bureaucracy is expanding to meet the needs of the expanding bureaucracy.”

In a context of ultra-high inflation, where central banks are ‘forced’ to hike up interest rates like there is no tomorrow month after month, owing 1.5 trillion euros can pose a real threat for Spain’s ability to repay back loan interests in the future, let alone the principal.

It is no longer far-fetched to imagine a scenario of interest rates reaching two digits over the next two years, much like in the eighties. This would seriously compromise Spain’s ability to repay its ever-growing debt interests, even compromising its borrowing ability unless the ECB keeps its policy of open hands.

If Spain continues its present course unchecked, it does not seem unreasonable to expect  ‘issues’ on repaying its loan commitments, or even raising new debt. As Italy’s situation is not much better, the European Union, in order to ensure its very own survival, should really start to rein in the borrowing of Spanish politicians and school them on the benefits of a frugal economy: to save money, invest it wisely, and think about the long run; not to overspend it and take on more and more loans they can’t repay.

Spain’s economy is not as resilient and strong as that of Germany; we categorically cannot be burdened with such high public debt figures in the long run least it compromises the economic viability of the country itself.

Better oversight

The EU should seriously consider monitoring where the over 130 billion euros in EU money sent to Spain is going. No one seems to know what this money is being spent on.

The EU’s high commissioner, Ms. Monika Hohlmeier, appointed to oversee the expenditure control of the EU’s Next Gen Funds across all EU member States, recently declared in an interview: “I have no clue what Spain is doing with it (EU funds)”. We could always ask Spain’s own national commissioner to shed some light on the matter but, oh wait, she resigned early on this year, so that’s that.

Billions of euros in EU taxpayers’ money are being squandered and no one knows where it’s going, and no one is held accountable. But clearly these EU rescue funds are not reaching struggling families or ailing SME’s, which was precisely the whole point of the Covid rescue funds.

I wrote an admonitory article on this almost two years ago: Now you see it, now you don’t - 12th February 2021

Conclusion

It is clear to me that Spanish politicians are burying their heads in the sand, refusing to acknowledge the harsh reality of a sharp rise in interest rates, all the while consumed by their own petty squabbles.

Unless the EU steps up, and acts decisively (even if spurred to act out of self-interest to ensure its own preservation), Spain will head down a dangerous path that could lead to repayment issues on its vast public debt.

As much as we are all (very) grateful to generous EU taxpayers’ solidarity through the Covid rescue funds (NextGen funds), the truth of the matter is that the EU is spoiling Spain like a child indulging it on its reckless credit addiction. Spain needs to grow up and face the harsh reality, adapting its economic policy to become more competitive and resilient in a digital economy, to reduce its overall expenditure (does our government really need 22 ministries?), to curb its insatiable reliance on public debt.

Madrid, Andalusia and Galicia have shown us there is an alternative, a way out of this vicious credit spiral through the pursuit of liberal policies that have helped their economies boom, unlike in the rest of Spain.

I fully understand that overcoming bipartisan rivalries is easier said than done, granted, but Spanish politicians really need to get their act together and start thinking about tomorrow, adopting a grand long-term strategy for the good of the country and its people, instead of just living for today burning borrowed money like there is no tomorrow; much like in Aesop’s fable of the ant and the grasshopper. Winter is coming.

The core argument I try make in this article is that the new ITSGF bill is a bad idea that exemplifies everything that Spain’s government is doing wrong economically, and that we ought to avoid at all costs. It is primarily a political tax whose purpose is more about firing up the base than raising tax. This government has proven adept at pinning the blame for economic woes they’ve helped create on easy targets such as banks, utility, and energy companies, and now the latest villain, the ‘super-rich’ (insert evil laughter here).

Back on planet earth, if our EU Overlords do not act to rein in Spain’s credit addiction, as clearly Spanish politicians are not fit for the task, Spain will endure serious financial problems in the future that could even threaten the EU itself.

The European Union is -without a shadow of doubt- the most ambitious and greatest political achievement of humankind of all time; a living testament to those eleven men that made it possible and averted all future wars in European soil. We should not jeopardize its future turning a blind eye on spoilt nations that are hell bent on inflicting themselves self-harm and which may even, in the near future, pose an existential threat to the strength of the Union.

There is still time to correct the course avoiding the choppy waters ahead. The EU must intervene and curb Spain’s unbridled craving for public credit embodied by Mr Sanchez. It is in the Union’s own best interests to put an end to it.

“Españolito que vienes

al mundo te guarde Dios.

una de las dos Españas

ha de helarte el corazón.” – Antonio Machado

Antonio Cipriano José María y Francisco de Santa Ana Machado y Ruiz (1875 – 1939). Brilliant Spanish poet and one of the leading figures of the Spanish literary movement known as the Generation of ’98. Died in imposed exile during the fratricidal Spanish Civil War. He is credited as being one of Spain’s most popular poets. Amongst his timeless classics, Campos de Castilla stands head and shoulders above the rest.

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