The UK Has lost many Wealth Creators when taxes were increasesd from 40% to 50%. Now Spain is going to do the same. Clever move from a Failing Economy?

Tax on Spain's Rich to Balance Deficit
Spain’s cash-strapped Socialist government is poised to emulate the UK and increase taxes on the rich, reversing its policy of tax cuts and prompting protests from the conservative opposition.


The impending U-turn - designed to plug the gaping budget deficit arising from the global economic crisis – was signalled this week by José Blanco, public works minister. “If we need to raise certain tax rates in order to guarantee social policies or public investment, then we’ll have to do it,” he said in a radio interview.

“I believe in helping those who most need it, and if in order to help the needy those who can most afford it have to tighten their belts in times of hardship, then we must say so clearly to the public.”

Spain has suffered one of the most drastic budgetary turnrounds in Europe as a result of collapsing government revenues and rising expenditure, moving from a 2007 surplus of 2.2 per cent of gross domestic product to a projected deficit of 10 per cent or more this year.

Spending has risen partly because the number of unemployed has reached more than 4m – at nearly 18 per cent of the workforce, the jobless rate is the highest in the EU – and partly because José Luis Rodríguez Zapatero, prime minister, has promoted higher spending and nationwide public works to stop unemployment rising even higher.

As late as June, ministers, who had previously presided over the abolition of Spain’s wealth tax, were denying the need for drastic tax rises, but duties on fuel and tobacco were raised that month. Business leaders are now predicting increases in other taxes, including value-added tax and possibly income tax. The UK government has decided to increase the top rate of personal income tax from 40 per cent to 50 per cent next year.

With the Spanish economy shrinking at an annual rate of more than 4 per cent, the government wants to avoid crushing any incipient recovery by raising taxes and discouraging consumption. But economists believe it has little choice because it will be difficult to curb spending.

“They are stuck with taxes,” says Dominic Bryant, senior European economist at BNP Paribas. “With a lot of rigidity on the spending side, taxes will bear more of the burden.”

Leftwing trade union federations welcomed Mr Blanco’s comments, but the conservative opposition Popular party – whose standing in opinion polls has risen during the crisis – criticised what it called the government’s threat to raise taxes on the rich. In reality, said the PP, any such measures would affect the middle class, since taxing only the wealthiest would raise barely any revenue.

Even a potential future PP government, however, would find it hard to rebalance the budget without resorting to more taxes now that the Spanish property bubble has collapsed.

Mariano Rajoy, PP leader, has called for “austerity” and said he would aim to reduce Spain’s budget deficit to 3 per cent of GDP – the same as the now widely ignored deficit limit set by the European Union.

Story from Financial Times

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