This Week's Focus: Tax relief in pre election times

This Week's Focus: Tax relief in pre election times


Recently, by surprise, the Government of Mariano Rajoy announced the advancement of personal income tax cuts planned for 2016, with immediate effect from 1 January 2015 for labor income and 12 July for capital income.

Without going into the details of the rebate, on which you'll find complete information on this link (, wonder how the government acts on one of the pillars of the tax system, committed at a time of fiscal consolidation, and a public deficit even outside the criteria of the European stability pact (the famous Maastricht Treaty that very few now remember ), based on which it could create the Euro and now no one (not Germany) fully preserves.

The precedent of Greece
That the measure is essentially electioneering is beyond doubt. It does after the fiasco of Syriza in Greece, and with silence acquiescent European Commission, is a detail that should not go unnoticed by the dates and surveys of voting, which we referred to other focuses, in which Spain affront a possible change of color in the next legislature.

By the volume of Spanish debt, Europe would not be able to deal with populist proposals such as the morality of part of the debt and others that probably would have devastating effects on the Euro this time. The Greek experiment has been sequels, and  Juncker and his pupil Rajoy have taken note. Nothing like a relief in the pockets of Spanish taxpayers a few months before the elections so that public opinion prefer to be more conservative and thus reduce the possibility of a clear triumph of Podemos.

Mariano the "Generoso"
But, why did you decide to play "only" income tax? From the outset, it must be said that the Spanish tax system is based on two main taxes: the income of individuals (income tax) levied on the income of families, and the Value Added Tax (VAT), which also falls on families and on the consumption of goods and services. Other taxes (Corporate and Special) and Public Prices, they have a relatively low weight.

In recent years, then the economic crisis, public revenue suffered a sharp cut, more than 5% in 2009 compared to 2008, which led to a record budget deficit of more than 11% of GDP. However, since 2009 the collection seat of individuals (income tax and VAT), has continued to increase, at the same time the deficit was reduced to 7.1% in 2013.

However, tax bases have declined, due to lower income and lower consumption, as reflected in these graphs:

Which means that to a large extent, the steering of the public deficit on the income side has fallen mostly on working families.

Half a percentage point of deficit, in exchange of Podemos
The downgrade approved means, on average, a 1% income tax savings on the stages of labor income, which amounts to approximately 4,500 million euros less revenue. Saving for professionals and freelancers, 4% in withholding their bills, an additional 650 million. And as capital income, the reduction of 1% means about 330 million euros.

Adding up, and estimating based on the latest published data, only 5.500 million of lower revenues, which represents approximately 0.5% of GDP. With this improvement, doubtlessly with the approval of Brussels, the government expects happy citizens with more money in their pockets, will not knock them out at the polls, and in Spain everything remains much the same. All? Well, the deficit too, since this will have to be paid later on.