Sweeping income and corporate tax cuts on the way…in Spain?
posted at 9:21 pm on June 26, 2014 by Mary Katharine Ham
In an attempt to boost economic activity and strengthen the ruling conservative coalition’s electoral prospects before November 2015, Spain is going to try economics, freedom-style:
Spanish leaders who broke their no-new-taxes pledge after taking office 2½ years ago announced sweeping tax cuts on Friday, saying it was time to compensate a recession-battered populace for its sacrifices and boost a nascent recovery.
Budget Minister Cristóbal Montoro, announcing the government’s main economic initiative of the year, said the planned reductions of income and corporate taxes will stimulate investment, creating jobs and making Spanish companies more competitive abroad.
They will also put more money in the pockets of consumers as the ruling, conservative Popular Party moves toward elections, which are expected as early as the end of next year.
Spain is no longer in recession as of 2013, but its unemployment rate stands at an appalling 26 percent. The ruling party hopes tax cuts will spur growth, allowing it to make promised cuts to its deficit without further gouging its citizens:
The plan is likely to come under close scrutiny from the European Commission, reflecting concern that reducing taxes could jeopardize Madrid’s pledge to cut its deficit to 3 percent of gross domestic product by 2016 from an expected 5.6 percent in 2014.
On Friday, the government also rejected raising Spain’s value-added tax despite suggestions from Brussels that Spain should consider increasing consumption levies and other indirect taxes to help meet deficit goals.
Instead, Mr. Montoro forecast that cutting taxes would increase both investment and consumption, helping to increase Spain’s gross domestic product and keeping the country on track to meeting its deficit targets.
Dan Mitchell, a tax policy expert at Cato, thinks the tax cuts are unlikely to happen or unlikely to stick unless they’re coupled with real spending restraint, but at the very least perhaps we can hope that if policies along these lines becomes fashionable in Europe, our liberal betters might adopt them like so many Empire waists and French bustles.
Montoro said workers would on average see their income tax bills drop by 12.5 percent by 2016.
The average corporate tax rate will be reduced to 25 percent from 30 percent over the two years.
The government estimates the measures will put some 7.6 billion euros ($10.35 billion) into the economy.
All of this is a bit of a make-up call from the conservative government, which implemented unpopular tax hikes upon coming into office, in a bid to deal with the gargantuan deficit problem.
Front page photo courtesy of Jim McIntosh on Flickr.