(Macroeconomics) Spain agrees on new asset tax for wealthy residents

Finance Minister María Jesús Montero describes the temporary wealth tax as one of 'solidarity' [File: Emilio Naranjo/EPA] Published On 29 Sep 2022

Spain’s Socialist-led coalition government has said that residents whose wealth exceeds 3 million euros ($2.9m) will be subject to a new asset tax in 2023 and 2024.

Finance Minister María Jesús Montero on Thursday described the temporary wealth tax, which she said will affect 23,000 people, or 0.1 percent of taxpayers, as one of “solidarity”.

She said people with holdings of 3-5 million euros ($2.9m-$4.8m) will be taxed 1.7 percent and those whose personal worth is 5-10 million euros ($4.8m-$9.6m) will be taxed at 2.1 percent. Individuals with fortunes above 10 million euros ($9.6m) will pay 3.5 percent. The tax is part of a range of adjustments planned for Spain’s upcoming budget that are aimed at alleviating the hardship caused by rampant inflation and soaring energy prices.

The government also plans to increase the income tax rate from 26 percent to 27 percent for people earning more than 200,000 euros ($191,870).

The capital gains tax for incomes above 300,000 euros ($287,805) will go up to 28 percent, an increase of 2 percentage points.

The Socialist party and its junior far-left coalition partner, Unidas Podemos (United We Can), agreed on the measures, which are expected to bring in 3.1 billion euros ($3bn) over the next two years.

The government said the money would be used to finance initiatives to help people with lower incomes.

The government plans to reduce the income tax on annual wages of up to 21,000 euros ($20,146).

Montero said this will benefit about 50 percent of the workforce given that the average annual salary in Spain is 21,000 euros ($20,146).

She said the changes would make Spain’s tax system “more progressive, efficient, fair and also enough to guarantee social justice and economic efficiency”.

The governing parties also agreed to reduce the sales tax on feminine hygiene products from 10 percent to 4 percent.

Spain recently approved windfall taxes on large energy companies and banks and has temporarily slashed the sales tax on natural gas from 21 percent to 5 percent.

The annual inflation rate climbed to 10.5 percent in Spain last month.

Spain’s regional governments also have some leeway on taxation. Two of them run by the conservative Popular Party – the country’s main opposition party – have cut real estate taxes. Regional governments run by the Socialists plan other tax relief measures for low-income earners.

This article discusses the finance minister of Spain’s implementation of an asset tax on residents whose wealth exceeds € 3 million in 2023 and 2024. This tax affecting 0.1 percent of taxpayers, is an initiative to alleviate the hardship on lower income households due to the rising of inflation and energy prices. The aim is to ensure more taxation equity across the country. Equally, the finance minister is planning on slightly increasing the income tax progressively by taxing the higher income workers proportionally more than the lower income workers. This change in Spain’s tax system, adjusting it to become more progressive is due to the increase in inflation.

The rising inflation in Spain inevitably reduces the purchasing power of many consumers, eroding their real income. Cost-push inflation occurs due to higher costs of production.

Spain’s “soaring energy prices” are detrimental to lower income households as they spend a higher proportion of their income on energy. As the energy prices rise which increases the costs of production for the economy, the short-run aggregate supply curve shifts left from SRAS 1 to SRAS 2. This shows the increase in the price level from P1 to P2 indicating Spain’s 10.5% increase in inflation for September 2022. Equally, there is a decrease in real GDP from Y1 to Y2. This is considerably affecting the 50% of the workforce who receive an average annual salary of € 21’000 a year. Thus, as this is half of the country’s population, it acts as an incentive for the government to review their tax system to alleviate the hardship on lower income workers.

Inflation disproportionally impacts low-income households, increasing inequality.

As more lower income earners will be spending more of their income on energy due to the rising inflation, this may result in a Lorenz curve that is skewed away from the line of equality. This highlights an unequal distribution of income. There is a movement in the curve from LC1 to LC2. The socialist party believes that the measures implemented, will bring in “3.1 billion euros in the next two years.”

After changing the tax system through the income tax, the gap between the equality line and the Lorenz curve may be smaller as it moves inwards from LC1 to LC2, closer to the equality line. This may ensure greater income equality. With the € 3.2 billion estimated revenue from the income and asset tax, one could assume that this revenue will finance initiatives for lower income households aiding them and therefore promoting equity. These lower income households will therefore be more financially stable, creating opportunities such as a good education, healthcare, and the possibility to access higher paying jobs. However, the article does not specify how the tax revenue will be used to foster inequality across the country.

As income distribution may become more equal, this will allow lower income households to inject more into the economy as they will be left with more disposable income. Spain’s government equally agreed to reduce the sales tax on feminine hygiene products promoting gender equality which is not specific on the Lorenz curve.

Spain’s asset tax implementation could be favorable for the economy. Indeed, the tax revenue could be used to pay for some of the deficit created by the pandemic. It will be essential for the government to balance their budget to redistribute this revenue in effective ways. As they are decreasing the regressive tax and not receiving revenue from lower income workers, this is applying pressure on their budget. They are dependent on the tax revenue which will be coming from the wealthy. However, the asset tax may push the wealthy population out of the country. They might decide to move their assets out of the country before the implementation of the tax for 2 years in 2023 and 2024 and evade taxes. This will put a strain on the government’s budget balance.

Moreover, the consequences of the income tax are that if the rates are raised to an unsustainable level, higher income workers may have less motivation to work consequently leading to lower productivity. Ineffective workers will be removed as high levels of production and efficiency are a goal for a market economy. A large portion of the population will fall below the middle class if income inequality is not encouraged, leading to an unskilled workforce that will ultimately decrease the labor force.

In conclusion, Spain is acting by changing their taxing system to ensure income equality across the country to keep the economy afloat. By promoting equity and benefitting lower income households, the country may be moving closer to equality if wealthier households avoid retaliation. As the measures are temporary this leaves the country in doubt on whether the government will be able to sustain this new taxing system.