The Tax Punishment of Spanish Families

The Tax Punishment of Spanish Families

Index Spain s income tax reduction for families is Europe s lowest 1 The third largest tax burden 3 Single parents are at a similar disadvantage 4 Negative taxes 5 What autonomous community is the most favorable when having children? 6 Conclusions 8

1 Spain s income tax reduction for families is Europe s lowest With the ageing of its population, new energy has been given to the Spanish debate on how to boost birth rates through public policy. Taxes play an important role since a greater tax burden reduces the disposable income of households, which in turn affects the financial viability of families. Regretfully, Spanish taxpayers who have children bear a tax burden that far exceeds that of their counterparts in other EU countries. By analyzing the wealthiest 15 countries in proximity to Spain, we find that Spain offers the smallest tax reductions for families. Even though an average income earner with two children pays 5% less in direct taxes than one who has no children, this reduction is considerably smaller than those of neighboring EU countries. This can be seen in the table below: Table 1. Tax reduction for taxpayers with two dependent children * Average wage in Spain calculated for 2016 with the national average personal income tax rate (IRPF). The fiscal encouragement of families is particularly strong in the cases of Ireland (-40,98%), Denmark (-27,35%), Luxembourg (-24,52%), United Kingdom (-20,75%), and the Netherlands (-20,45%). Also, reductions of 10% or more can be seen in Austria (-15,73%), Italy (-15,63%), Germany (-13,83%), Belgium (-13,75%), Norway (-11,71%), and Finland (- 10,69%). Trailing behind are Portugal (-9,78%), France (-8,42%), and Sweden (-7,52%).

2 Consequently, Spain is the European country that offers the least tax advantages to families. The 5% reduction in direct tax that applies to a taxpayer with two dependent children is just a third of the average of -16.4% across the 15 countries studied.

3 The third largest tax burden In addition to the differences between taxpayers with dependent children and those without, it is important to examine the total direct tax contribution of payers with two dependent children. In the case of Spain, the effective rate is 34,43%. Only France and Belgium have higher rates, at 36,75% and 36,11%, respectively. In other words, Spain has the third largest tax burden for families out of the 15 European countries in question. Below the levels observed in Spain we find Sweden (32,99%), Germany (31,32%), Austria (29,05%), Finland (27,70%), Italy (26,74%), Portugal (25,17%), and Norway (22,20%). More favorable circumstances that support higher birth rates can be found in the Netherlands (11,61%), Denmark (9,09%), Luxemburg (5,85%), and the United Kingdom (5,65%). In Ireland, the effective tax rate is -18,85%, a negative tax. This means that, in addition to not paying direct taxes (in net terms), one receives transfer payments in the form of benefits. Table 1. Tax reduction for taxpayers with two dependent children * Average wage in Spain calculated for 2016 with the national average personal income tax rate (IRPF).

4 Single parents are at a similar disadvantage If we examine the case of a single mother or father with two dependent children, a similar situation emerges. Spain once again stands out as a high-tax country compared to the European average. For an average income of 26,162 euros, the real direct tax rate is 34,43%, exceeded only by those of Belgium (36,11%), France (36,75%), and Greece (37,46%). The conditions are more favorable in Sweden, (32,99%), Germany (31,32%), Austria (29,05%), Finland (27,70%), Italy (26,74%), Portugal (25,17%), and Norway (22,20%). Better yet at encouraging birth rates are the tax conditions in the Netherlands (11,61%), Denmark (9,09%), Luxemburg (5,85%), and the United Kingdom (5,65%). Again, Ireland stands out as the best when it comes to encouraging birth rates through taxes. Its negative tax rate turns a gross salary of 23,092 euros into a net remuneration of 30,396 euros once the effective tax rate of -18,85% is applied. For lower incomes Spain does not fair much better. An income of 15,500 euros (the most common annual income) results in a direct tax rate of 27,91% for a single parent with two dependent children. This puts Spain ahead of Austria, Germany, Sweden, Belgium, France, and Greece, but behind Finland, Italy, Portugal, Norway, the Netherlands, Denmark, Luxembourg, the United Kingdom, and Ireland. This result is alarming since Spaniards generally suffer from low wages compared to many other post-industrialized countries. Table 2. Direct tax rates (personal income tax [IRPF] + social security contribution) for a single parent with two dependent children *For 15 EU countries. Single-parent family with two children and an income equivalent to 67% of the average gross salary of each country. Tax regulation for 2014. 1. Calculations for 2016 for an average income of 26,162 ; personal income tax (IRPF) calculated using the average for the autonomous communities with Navarra and the Basque Country included. 2. Calculations for 2016 for the most common income of 15,500 ; personal income tax (IRPF) calculated using the average for the autonomous communities with Navarra and the Basque Country included.

5 Negative tax rates As evident above, the Irish system of benefits and deductions converts a gross salary of 23,092 euros into a net salary of 30,396 euros, a gain of 7,304 euros for the taxpayer. This negative tax scheme can also be seen in the United Kingdom (890 euros) and Luxembourg (2,094 euros). This model stands in contrast to that of Spain, where a single parent with two dependent children who makes 26,162 euros gets to keep a net income of 22,282 euros, a reduction of 3,880 euros. For a lower gross salary of 15,500 euros, the net salary is 14,515 euros as 985 euros goes to taxes. Table 3. Income tax rates for a single parent with two dependent children. * For 15 EU countries. Single-parent family with two children and an income equivalent to 67% of the average gross salary of each country. Tax regulation for 2014. 1. Calculations for 2016 for an average income of 26,162 ; personal income tax (IRPF) calculated using the average for the autonomous communities with Navarra and the Basque Country included. 2. Calculations for 2016 for the most common income of 15,500 ; personal income tax (IRPF) calculated using the average for the autonomous communities with Navarra and the Basque Country included.

6 What autonomous community is the most favorable for having children? While the above figures for Spain are based on an average personal income tax rate (IRPF) for all autonomous communities, there are regional differences for taxpayers who have children depending on what autonomous community in Spain the taxpayer lives in. The difference in income tax can be up to 842 euros per year between a parent with dependent children in Navarra and one in the Basque Country. This is no accident: the government of Navarra imposes the heaviest tax burden on families with children, whereas the Basque Country is the most encouraging autonomous community in this regard. If we consider the differences between the various autonomous communities, we find that a taxpayer who has two dependent children and earns a gross salary of 26,162 euros can save up to 2,335 euros if residing in the Basque Country. In Navarra, the corresponding deductions only add up to 1,493. In terms of direct tax rates, the burden on a taxpayer with two children varies between 32,37% and 35,25%. The same taxpayer, if they have no children, would pay about 39% tax. Table 4. The effects of having children on personal income tax (IRPF) in each autonomous community (Gross salary: 26,162 ) When examining the tax regimes of the autonomous communities more closely, we learn that the Balearic Islands and Madrid apply a minimum additional contribution for the third and fourth child that is higher than the central government s norm. They remain the only

7 communities that do so since Cantabria stopped. By contrast, in Asturias and Andalusia, there are extra deductions for single-parent families, whereas in Madrid there are transfer payments for those taxpayers who have two children or more whose incomes remain below a minimum taxable threshold.

8 Conclusions Civismo supports fiscal reforms that aim to reduce the tax burden on Spanish taxpayers. The present comparison to Europe should encourage us to reflect upon the benefits of reducing the direct tax pressure in Spain in order to raise the disposable incomes of households and strengthen families. Civismo also recommends that autonomous governments seize the opportunity that their status offers by implementing policies that seek to offer better tax conditions for the taxpayers. To this end, any and all efforts to reduce taxes in the autonomous communities are encouraged.

9 About the report This report was originally published by Civismo in Spanish under the title Castigo fiscal a las familias españolas in March 2016. It was translated into English by Filip Norén, assistant researcher at Civismo, in March 2017. This report uses statistics from the OECD as its source. Any data referring to Spain was produced for Civismo by Cristina Berechet, former Head of Research at Civismo. Berechet holds a Master in Economics and Finance from the University of Navarra and has coordinated research projects in fiscal policy, pensions and public debt, etc. About Civismo Think Tank Civismo is an initiative to promote civil society in Spain and the exercise of personal and economic freedoms. It is funded through private donations. In 2016, Civismo saw 1084 appearances in 132 media outlets, reaching an audience of 102 million people. Led by President Julio Pomés, Civismo has a network of influential collaborators, such as Pedro Schwartz, Daniel Lacalle, Francisco Cabrillo, and Rafael Pampillón. Contact us Marta Quintín Head of Communications @TTcivismo +34 914 02 30 95 comunicacion@civismo.org