Last Friday the Council of Ministers approved a new tax reform, and Moncloa unveiled the best part. First, personal income tax rates have been reconfigured to where they were in December 2011, which was just before Prime Minister Rajoy came into office and lowered them.
People in the middle and lower tax brackets will benefit from the change, although the highest tax bracket will end up paying more than they were four years ago. The government also announced that it would trim corporate tax rates for big companies by 30-25% in 2016 and 27% in 2015. Meanwhile, small- and mid-sized companies will keep being taxed at 25%. Yesterday, Cristóbal Montoro started to unveil the reform?s fine print and the Finance Minister has stood by his initial plan, although his intentions were later softened by Mariano Rajoy in order to keep voters happy. Montoro is lowering taxes and of course will not give up but gain revenues, because the myriad tax hikes will more than compensate for a few cuts. Also, he has not been paying attention to a report from a group of experts on this tax reform. Currently, the average tax rate for major corporations is around 13% because of deductions that they get. After nixing most of those deductions, their actual tax rate could go up by nearly 10%.
The measure will also affect small- and mid-size companies, who will not get a tax reduction. While trimming taxes is good in that it makes the tax structure simpler, it puts stress on Spanish companies that are hurting. For example, the deduction for financing costs is going away, which will give them an incentive to raise capital. The idea is good in theory, because it could lower debt levels and encourage them to bolster cash reserves. The problem is that many companies are not in a safe position to do this so quickly, and the new taxes will not give them a lot of breathing room. The Finance Minister is the biggest benefactor, because it will increase its tax revenues by getting rid of corporate deductions and increasing the personal income tax.
With these reforms, Montoro is lowering taxes in some places only to raise them in others. The main goal is to balance the government?s budget and lower the national debt. But there are other ways to do this while overhauling the tax system, creating jobs and stimulating growth. Now, small investors and small companies are hurt the worst. Starting next year, investors will lose a tax exemption for the first 1,500 euros of stock dividends that they receive. This is a big blow for small investors and the Spanish stock market, which has been attracting these types of investors.
The reforms do not make the changes and improvements to the tax system needed, and surprises in the small print indicate that once again government is using tax hikes to increase its revenues and avoid cutting taxes in order to stimulate growth.
