Spain’s government will cut both corporate and income taxes early next year in an attempt to strengthen the economy and bolster the electoral prospects of the ruling centre-right Popular party.
The move, agreed by the cabinet on Friday, is likely to mark the last reform effort by the government of Mariano Rajoy before next year’s general election.
It comes as Spain’s economic recovery shows signs of gaining in strength, with growth set to exceed 1 per cent this year and reach about 2 per cent in 2015.
“The time has come to lower taxes for everybody . . . for Spaniards to receive the compensation for the efforts they have made during the recent crisis,” said Cristóbal Montoro, budget minister. He said the benefit of the reform would lift national output by up to 0.55 per cent over two years.
Mr Montoro insisted the tax cuts – which will be partly offset by phasing out deductions and exemptions – would not limit Spain’s ability to meet the deficit targets set by the European Commission. Spain’s tax revenues, he added, were on the rise because of the nascent recovery.
Brussels has told Madrid to bring its deficit back below 3 per cent of gross domestic product by 2016. Spain is expected to post a deficit of 5.6 per cent this year, suggesting the government will have to find more savings, or rely on a sharp lift in economic growth to boost tax revenues.
Under the changes, the top rate of income tax will fall from 52 per cent to 47 per cent next year and 45 per cent in 2016. The bottom rate will fall from 27 per cent today to 24 per cent and then to 23 per cent. On average, said Mr Montoro, taxpayers would pay 12.5 per cent less on their income than at present.
Corporate tax will fall from 30 to 28 per cent next year and 25 per cent in 2016. Start-up companies will benefit from a reduced corporate tax rate of 15 per cent.
The reform is set to leave Spain’s much-criticised system of raising value added tax in place, however.
At 21 per cent, Spain’s standard VAT rate is broadly in line with that of other EU countries, but Madrid then exempts an unusually large number of goods and services from the full rate. In 2012, for example, Spain’s VAT take accounted for only 5.5 per cent of GDP, compared with an EU average of more than 7 per cent.
“They want to lower the tax rate and at the same time reduce deductions – that is the right way to go,” said Juan Rubio-Ramírez, an economist at Duke University in the US. “But they are not facing up to the real problem: we need to increase tax revenue, and the only way to increase revenue in Spain is by raising the take from VAT.”