Taxes… And now what?: Three proposals on the tax system

These are times of possible political change and therefore of reflection on the most advisable changes in our tax system. It is not the objective of this brief article to go into detail about the feasible modifications, but to identify three important areas for improvement.

One: quality and stability

For the higher quality and stability of tax regulations. In the movie Interstellar, the protagonist, after avoiding the loss of his spaceship thanks to a complex maneuver, exclaims: “Okay, for the next trick!”. It is the same feeling of many prosecutors after the approval at the end of last year of Law 38/2022, of a lamentable technical level, pending the next government nonsense. Tax regulations determine an economic sacrifice for citizens and therefore need special moral, legal and economic foundations..

It should not be possible, therefore, that, as has happened with that law, the public information process is fraudulently stolen from citizens, the reports of expert bodies (such as the Council of State) are blinded, or new taxes are introduced like paratroopers in the process of amendments (this has been done with the solidarity tax of great fortunes)..

In the future, our public decision-makers must, of course, avoid unlawful and uneconomic occurrences.. But in general, they will have to provide the tax system with the greatest transparency and legal certainty, avoiding its continuous changes; facilitating general interpretative provisions of the most difficult regulations; resolving tax inquiries completely, accurately and on time (and with the staff of the General Directorate of Taxes, without “loans” from other institutions); focusing on Prior Valuation Agreements (Advanced Pricing Agreements or APA) for complex operations, agreed between taxpayers and the Administration, subcontracting specialized personnel if necessary; and once and for all developing “cooperative compliance” (relationship between the Tax Administration and large companies in which, in exchange for their greater transparency, the AEAT helps the entity to correctly determine their tax contributions). In general, it is a matter of establishing effectively the preventive actions, which for this will have to be conveniently included in the objective plans of the Tax Administration..

Two: fiscal pressure

Due to the reduction of the fiscal pressure, generating favorable expectations, while moderating public spending. Taxation means a deprivation for citizens and distorts the proper functioning of the economic system. Therefore, given that taxes are essentially an instrument for financing public spending, it is fundamental ab initio that this be the minimum necessary to meet the objectives of providing public services and income redistribution.. Talking about the level of taxation without first proposing a prudent level of public spending is another of the usual “tricks” of certain public powers.

It is surprising to see that Component 29 (“Improving the effectiveness of public spending”) of the Recovery, Transformation and Resilience Plan prepared by the Spanish government to receive European funds, does not contain any reference to the moderation of public spending in the future. Hence, it could not be less, Component 28 of the Plan (“Adaptation of the tax system to the reality of the 21st century”) states that our fiscal pressure (ratio between tax and Social Security collection, and GDP) must be equal to that of neighboring countries.

But if in Spain we have lower per capita income and we believe in the progressivity of the tax system, our level of taxation should also be lower for this reason.. In addition, according to the Independent Authority for Fiscal Responsibility (AIReF), tax pressure has increased significantly in recent years.. Furthermore, the increase in taxes would make us lose international competitiveness (because of the transfer to prices and the lower foreign investment) and would encourage fraud.. The tax reduction that some propose is reasonable, deflating the general income tax rate, to avoid the trap of “cold” progressivity. In 2022, the collection from this tax, the one with the highest collection capacity in our system, increased by 15.8% (almost 15,000 million euros), mechanically due to the salary increase (+2%), even though it was below inflation (+8.4%). Thus, real wages have been reduced (-6.4%, due to the difference between the previous figures, -5.3% according to the OECD), citizens losing purchasing power, and yet the higher nominal wages have determined a higher percentage of tax.

Furthermore, one must be cautious in tax reduction approaches until the level of public spending is subject.. It would be interesting, in terms of public marketing and the generation of favorable expectations, to issue signals representative of that philosophy, of moderate collection cost, such as the reduction in some points of the general rate of Corporation Tax (today 25%), graduated over two or three years; or as the 100% recovery of the exemption of dividends and portfolio capital gains in that same tax; or as the improvement of the treatment in the IRPF of the capital gains obtained in the medium or long term.

Three: R+D+I effort

For the most determined effort in research, development and innovation (R+D+i). It has been said that “the future must not be foreseen, it must be invented” (Alan Kay). If we believe that the embryo of the best future can be found in R&D, there is no other way than to aim resolutely from the public sector at that objective.. At the moment in Spain we are not doing well. According to the recent European Innovation Scoreboard 2023, we continue to sit in the van of the mediocre European Union, as a “moderately innovative” country, in 16th place out of 27 Member States, below the European average (we are at 89.2% of that average, and well below some indicators, such as “innovation in SMEs”)..

Beyond the relevance of public spending to promote research, there is a consensus on the potential effectiveness of tax incentives for R&D, since they are immediately accessible to any company that meets the legal conditions for it.. In particular, the deduction for R+D+i activities allows to reduce the Corporate Tax quota —also accessible to individuals in personal income tax— or to monetize the incentive (that is, to recover it directly as a tax refund) under certain conditions.

Once again, in this particular field, legal certainty is greatly lacking. The conditions of application of the incentive are the usual object of tax verification, from criteria that are often excessive. The so-called “motivated reports”, issued by specialized public bodies that certify the innovation and that must be respected by the AEAT, are not obtained within reasonable time limits and only cover the qualification of the innovation, and not the specific amounts applied to it (researcher salaries, consumable costs, etc.). On the other hand, it is very difficult to obtain an APA if it involves investments in R&D of not such a high amount.

All of this needs to be reviewed immediately so that, at least in the field of tax advantages, research momentum is not lost..

*Salvador Ruiz Gallud, managing partner of Equipo Económico and former director of the Tax Agency