Government tax reforms, which elEconomista has read, will lower income taxes, simplify corporate taxes and keep the tax rate higher than the savings rate at least for now. The good news is that the VAT will not go up.
The government wants to change its tax policy, which will probably happen in March, mostly to stimulate domestic consumer spending. Export sales are fueling the recovery and improvements in the financial arena right now, but at-home spending needs to return in order to increase tax revenues. If the government can do that, then it believes it can trim the annual deficit.
Rajoy thinks that administrative tax cuts within government have reached an end, although the Finance Ministry still needs to make sure that nobody spends a single euro over budget. In short, enforcement is critical. This strategy will require a deep tax reform so that increased revenues can pave the way for a lasting economic recovery. If this big gamble does not pay off, we will have lost another opportunity. Most experts believe that a sharp tax cut would energize the economy and get us out of the crisis.
Finance is probably going to cut the personal income tax and retain deductions in some places, such as housing. Both measures are widely supported, because they put cash in consumers' pockets. The decision will likely have political implications, too, because the government wants to propose the consumer-friendly tax changes during the 2015 electoral campaign. Ultimately, the next proposed tax change is unfair even though future tax changes will be more beneficial. Policymakers are acting too conservatively considering the economic climate we are experiencing.
