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Despite the controversy created by the proposals from the Committee of Experts for the Reform of the Spanish Tax System, Fernando Fernández says that in the medium term "we will see most of them being applied"
21.04.14 - 12:17 -
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"Inheritance tax here is almost confiscatory"
Fernando Fernández was chief economist at the FMI. :: SUR
Fernando Fernández, professor at the Business Institute and former chief economist at the FMI, is one of the nine experts who have drawn up the so-called ‘Lagares report’: a guideline for tax reform. Its 125 proposals are not binding but he is sure that in the medium term “almost everything” that they have recommended to the government will be carried out.
–One of the aims of the report was to generate debate about tax reform. It definitely did that - were you expecting it to cause as much controversy as it did?
–Yes, because what the report does is suggest a certain revolution in taxation. We want to achieve a modification in each and every tax and this would affect the powers of town halls, regional governments and the central government... It’s logical that there will be debate. And I believe this is a good thing because we are starting to have an informed fiscal debate. We are looking at how things are: what is happening in Spain and what is happening in other countries, what has to be done and what it will take to achieve it.
–Why does Spain need tax reform?
–Spain doesn’t collect much in the way of taxes and what it does, it does badly. It collects little because if we compare income from taxation in terms of GDP with that of neighbouring countries, it is lower. But we also do it badly, with very high nominal rates but very low effective ones. Income tax rates over 45 per cent are very rare in Europe, but in Spain they go up to 53 or 56 per cent. And for companies we have a very high rate but what the Ibex companies really pay is very little, about 13 per cent. Why? Because we have a tax system which is full of loopholes, like a Gruyere cheese. We add all sorts of exemptions and allowances to the base rate, so there is a big difference between what we want to receive and what we actually get. This has to be sorted out.
–Does this mean that taxes are going to go up?
–No, no, no. We propose maintaining fiscal pressure at the present level, 38 per cent of GDP. The reform would transfer the load from direct to indirect taxation. Income and company tax would go down and IVA and environmental taxes would increase. Also, we would create a fiscal devaluation by reducing the contributions from companies. This is for two fundamental reasons: one, to generate growth and employment, and two, because it is not true that tax on consumption is socially unfair.
–Have you quantified the effect this change in taxation would have on employment?
–The reduction in income and company tax would increase GDP by 0.3 per cent. If we add the additional 0.7 per cent from the lowering of social contributions, this gives an increase in GDP of one percentage point. This would generate between 350,000 and 400,000 jobs within the first year after the reform.
–Of all the measures you have proposed, which ones do you believe the government will apply?
–It is unfortunate that the report has come out during a pre-electoral period, so between now and June it will be practically impossible for anything to be done. But I am convinced that in the medium term we will see some success because what we are proposing, deep down, has the consensus of the scientific community and international organisms.
–But on the same day that you presented your report, the government announced that it was not planning to apply your proposal to withdraw the purchase of a habitual residence from deductions, or include housing as income for income tax. How did that make you feel?
– Well, not good, but in general the government has been very respectful about the report. We are aware that we are proposing things that are politically difficult, and at a difficult time. We are not naive, but we are fully aware of what our obligations are. Now the government has the ability to study the changes and apply them as it sees fit. But I sincerely believe that nearly everything we have proposed will be applied, including with regard to housing.
–But changing the way housing is treated in terms of taxation in a country like Spain would not be at all popular. What motives would there be to do that?
–In Spain a home is something sacrosanct and that has to come to an end. A property immobilises many resources that could be used for other types of asset. We thought it was the only secure investment, but then we found that it wasn’t. Also, parents used to leave their houses to their childrenbut nowadays, a property is often a burden.
–You propose a reduction in Inheritance tax, something that people in Andalucía are calling for.
–Inheritance tax in Andalucía is unique. I have never seen anywhere else where the tax rate varies according to the wealth of the person inheriting. It is almost confiscatory. And it is strange because the proposal we have made for inheritance tax has caused ructions in Madrid as well as in Andalucía, and they are at both ends of the scale regarding this tax. We propose setting a fixed rate of between four and ten per cent, which is multiplied by a coefficient according to the closeness of relationship to the deceased.
–At a time when everyone is talking about supporting small and medium businesses, you want to put company tax up.
–The way in which company tax is designed in Spain stifles businesses. When companies reach a certain size and would have to pay 30 per cent instead of 25, they either don’t grow or they create a subsidiary. The best policy for a small or medium business is to help it stop being a small or medium business. And with support from the start, that should happen.
–You are accused of being lukewarm about tax fraud.
–No we’re not lukewarm about it, we’re quite drastic. But tax fraud in Spain is overvalued. We have to stop legal loopholes for avoiding taxes. And we have to re-centralise the tax agency so it is responsible for collecting all taxes.