Faced with hard times, Spanish regional governments have slashed spending in order to fix their budget problems while also putting more pressure on taxpayers in several ways.
First, they have increased personal income taxes at the regional level. Regions such as Madrid have avoided this fate and, in fact, have dropped this tax slightly. Catalonia, in contrast, is squeezing salaries tight. People in the highest tax bracket in that region pay 56% of their income in taxes, which is equaled only by hard-hitting Scandinavian countries.
Also, the regions have created brand new taxes. This strategy exists within all regions under a common tax plan (which excludes the Basque Country and Navarra), and there are more than 70 separate regional taxes in place today. That said, a lot of taxes says nothing about their efficiency.
Lately, Catalonia is the paradigm: despite having created 30 new taxes, the government's net tax revenues fell 13.3% year-to-year in July. The failure proves an economic theory that has played out over the decades: raising money through taxes alone does not work.
Why? Because what the regions earn by raising taxes or creating new ones, they lose through a falling tax base. In other words, people end up spending less. Nothing hurts consumer and corporate spending more than knowing that most of their efforts to make money will go toward paying the government.
