The Spanish second Vice President, Elena Salgado, promises a tax reform which could bring a revenue increase of one point on GDP according to the following story from El Pais newspaper.
 
At a cabinet meeting on 26 September, delayed while waiting for president José Luis Rodríguez Zapatero to return from the US, Elena Salgado proposed a tax reform within the General State Budget for 2010.

Salgado, Spanish Minister of Economic Affairs, stated that Spain has one of the lowest VAT revenues on GDP in Europe, but declared that from 1 July 2010 general VAT will rise from 16% to 18%. Reduced VAT will rise from 7 to 8% while super-reduced VAT, which applies to basic foods, will remain at 4%.

"These are austere budgets that contribute to changing our model of production and hence employment recovery," said Salgado. "They affect social spending, in protecting those who are suffering most from the effects of the economic crisis and begin a rebalancing of public accounts.”

Specifically, Salgado stated that 51.6% of the spending bill  will go on social protection. A further 21% will be devoted to transfers to other communities, 6.6% to interest payments on debt, 6.3% for infrastructure and R&D, and 6.2% on basic public services (Justice, Public Safety or health).

On the other hand, Salgado explained that the draft law as part of that tax reform will include the abolition of the 400€ deduction in income tax. She explained that the 11.5 million taxpayers who declare less than 6,000 euros in annual capital return will see taxes increase from 18 to 19%, an average of 6 euros per year, while 6% of taxpayers who declared capital increased income (which contributes 83% of the total revenue made by the State) will face an average tax increase of 5,000 euros more per year, i.e. a rise to 21%.

The higher tax bracket, for those who earned more than 1m euros per year, will have a tax bill of 30,000 euros on average.

Salgado explained other measures, such as five-point reduction in corporate tax for SMEs with fewer than 25 workers, who have income of less than 5m euros and maintain or increase jobs.

In addition, there will be reductions in income tax for the self-employed (which is taxed through personal income tax and not modules) who create or sustain employment.

According to the Vice President, all these measures would lead to an annual revenue increase of one point of GDP. An increase in cash terms will be reflected in 2010 and 2011.

Salgado, who preferred to first explain the changes in spending on changes in income, has also explained that public spending is reduced by 3.9%. This, along with the tax increase makes the deficit estimate for 2010 vary from -5.7% to -5.4% of GDP.

Thanks to this reform, Salgado explained , the autonomous communities will increase income, overall, to 2,810 million, although the Vice President has been unable to ensure that the regional administrations will be able to use this increased revenue to reduce public debt.

The second Vice President Maria Teresa Fernandez de la Vega, declared it "an equitable and inclusive reform". In response to critics she said, "Our tax burden will remain below the European average.”

The budget now submitted to Parliament for approval, she added, is "realistic, rigorous and fair, thinking of those most affected by the crisis." The government will continue to plan infrastructure investment and effort in research, but also maintain the social protection efforts.

Fernandez de la Vega believes the most important points of the budget are the rise in minimum pensions, scholarships, unemployment benefits and measures such as subsidy of 2,500 euros per child birth or adoption, politics of dependence and higher wages for civil servants, whose union representatives thanked the Vice President for her willingness for dialogue.

VAT rates

• General VAT: applies to general goods, including clothes, appliances, tobacco, alcoholic drinks and all items not specified in the other two sections. From the VAT reform approved today by the Council of Ministers, these products will be taxed from July 2010 at 18% rather than 16% today.
• Reduced VAT: goods and services in this category will be taxed at 8% from July 2010, compared to 7% today. This category includes a range of items, from entry to cultural events (cinema, theatre, bullfights), catering services (restaurants, bars), housing, passenger transport,  services rendered by performers and artists , prescription lenses, funeral services.
• Super-reduced VAT: basic goods and services are taxed at 4%, as are most foods (bread, eggs, cheese, vegetables, fruits etc.) drugs, subsidised housing.

To see the original El Pais article in Spanish, please click here