The government's attempt to levy a heavy tax on severance packages greater than 20,000 euros is raising hackles inside and outside of the Peoples' Party. Montoro and crew are being pressured so much that the Finance Minister has no option but to calm things down.
This is a lot of noise over a law that will only bring in between 70 and 130 million euros, but could do a lot of damage to the Peoples' Party, which is trying to improve its standing heading into the next round of elections after disappointing results in European elections. The team of technocrats is tightening a measure that is necessary, but needs a clearer design. There are two possibilities on the table: first, double the severance pay cutoff to 40,000 euros and make a cap at 4,000 euros for every year worked or, second, copy the Basque country and Navarra and set an 180,000 euro cap.
Raising the number to this would exempt 95% of all people receiving severance. The technocrats need to make Montoro understand that the law should be applied based on how much money people are getting and that 20,000 euros is not the same as two million euros. That said, Montoro needs to set aside any party interests and focus on the fact that this measure has been applied everywhere in Europe except France.
Taxing severance pay is an indirect way of making layoff costs cheaper, because Spain has been unwilling at this point to enact deep employment reforms as the IMF and EU have asked for. Further, this could provide some relief for the Social Security system's accounts if the government uses the extra tax revenues to pay for some of its pensions.
