Euroresiuk

Effects of Income tax reform in Spain

Proposed withdrawal of tax rebate will affect medium income households the most

Despite declarations by Spanish president José Luis Rodríguez Zapatero denying that medium income households would suffer the most from the government’s proposed increases in income tax the opposite appears to be the case with those on small or medium sized incomes most at risk of losing out. In a simulation carried out by the Spanish daily newspaper, El Pais, based on the government’s proposal to withdraw the 400 tax rebate introduced last year the results showed that over half the money the treasury wants to “claw back” would come from those earning one or two thousand euros a month.

The reasons behind this is that most of the income tax rises would be a result of the withdrawal of the 400 euro tax rebate which mostly benefited those earning medium sized salaries and pensioners. Nevertheless, it is also possible that the government will maintain this tax deduction for those on low incomes and will use it as a bargaining tool in order to negotiate with other parliamentary groups in order to get support for next year’s proposals for public accounts.

The 400 euro tax deduction was introduced last year in order to help households on medium sized incomes at a time when the treasury’s accounts were in a much better state than now. In general it benefited those earning at least 12,000 euros a year and it will be this group who will be most affected if the measure is withdrawn completely. Based on figures taken from 2007 those earning between 12,000 and 21,000 euros a year will be those who will end up paying more according to the Treasury.

The government has defended its proposals to withdraw the 400 euros tax rebate saying that this measure was adopted to help families pay their mortgages at a time when both the Euríbor and inflation were ‘very high’ and was therefore only intended to be a temporary decision.

However, if the 400 euro tax rebate is withdrawn those earning 1000 euros a month could see their monthly income tax rise by 24% and those on two thousand euros a month could see their monthly income tax rise by 11%. Moreover, no announcement on VAT rises has yet been made and any increase in this indirect tax would affect low and medium income households the most.

Source: El Pais