Five clarifications on the 'lowering' of taxes in Germany (which is neither such nor can it be applied in the same way in Spain)

The German Finance Minister, Christian Lindner, presented this Wednesday a fiscal "relief" plan of 10,000 million euros in 2023 that the right-wing in Spain has agitated as an example of the "tax reduction" that they consider essential as a response to the energy crisis and inflation. The campaign was led by the president of the Popular Party (PP), Alberto Núñez Feijóo, who told the Government of Pedro Sánchez that "it is necessary to lower taxes and deflate personal income tax for medium and low incomes to stop suffocating the Spanish", linking in Twitter an information about Lindner's proposal.

The model chosen by Feijóo collides with several inaccuracies and contradictions and faces recent warnings from institutions such as the European Central Bank (ECB) or the International Monetary Fund (IMF) on measures in response to the war. Both have agreed, in two reports published in recent days, in recommending that European countries abandon policies aimed at subsidizing the cost of energy at a general level, throughout the world (with measures such as discounts on fuel or tax breaks), in exchange for focusing on helping only the most vulnerable.

"Incentives should be aimed at reducing the use of fossil fuels and energy dependence on Russia, while maintaining sound public finances," adds the institution chaired by Christine Lagarde in its report.

But, in addition, the German example taken by the PP and other right-wing parties such as Ciudadanos stands out for its fragility on several points. As the liberal Lindner's plan has not yet been approved and is opposed within the coalition government of Germany, with Social Democrats and Greens, and also outside. Or that it is proposed in an economy with greater fiscal margin, despite what the effort that Spain has already made is similar.

The plan of the leader of the Liberal Party (FDP) has been criticized from the German Executive itself, mainly because it favors above all the richest. Both the Social Democratic Party (SPD), led by Chancellor Olaf Scholz, and the Greens, led by Deputy Chancellor and Economy Minister Robert Habeck, have called for improvements to the proposal and greater "relief" for low-income people.

“Billions in tax relief, from which high-income earners benefit three times more in absolute terms than those with lower incomes, is out of step with the times,” said Katharina Beck, the financial affairs spokeswoman for the Green party. "The opposite would be correct. Strong shoulders should have to bear more than low-income ones," she added.

The tax "relief" included in the project is not "a tax cut", as it has literally been described in Spain. Exactly, it plans to raise the threshold of exempt income from what would be IRPF in Spain, from the current 10,347 euros per year to 10,632 euros in 2023, and to 10,932 euros in 2024.

This measure is a deflation of the income tax, which economic theory defines as an adjustment to adapt it to the effect of inflation. In other words, it is not a reduction, it is a way of not increasing the fiscal pressure in a context of general price increases. The objective would be to prevent a taxpayer whose salary is growing from losing purchasing power due to the combination of the effects of inflation and a change in the tax rate applicable to his income.

In the same sense, the maximum tax rate (42%) that currently starts at 58,597 euros per year, in 2023 would not apply until 61,972 euros, and in 2024 from 63,615 euros. Regarding criticism, until now the only concession made by Lindner would have been to maintain the special rate, known as "the tax for the rich", of 45%, on income above 530,634 euros per year.

The fiscal effort, that is, what Germany would stop entering according to the Liberals' proposal, would not reach 10,000 million, since other aid is also included in this figure.

But even taking the 10,000 million as a reference, the effort would remain at 0.6% of its total income, according to calculations by the economist Daniel Fuentes. A percentage similar to what the tax cuts approved by the Government already represent in our country (see graph). Those of VAT and special taxes on electricity.

The PP also seems to ignore in its statements that Germany's fiscal margin is much greater than that of Spain. To the point that in the main economy of the eurozone the debate has been opened on whether the effort of 10,000 million is compatible with Lindner's own purpose of once again complying in 2023 with the so-called debt brake, which requires a deficit that is not above 0.25% of GDP.

After the increase in debt caused by the shock of the COVID-19 pandemic for all economies, the over-indebtedness (over GDP) of our country reaches 115%, while that of Germany barely exceeds 66%. This major difference serves to understand that collection measures should not be approached from the same perspective in one economy or another.

Recently, the Minister of Finance, María Jesús Montero, once again reaffirmed the Government's deficit path. According to her objective, the gap between expenses and income will be 5% in 2022 and 3.9% in 2023. A tolerable goal because the European Commission keeps the rules on an excessive imbalance suspended.

These stability rules force the different countries to maintain a deficit below 3%, two points less than the forecast for this year in Spain.

The health crisis caused by the pandemic had a full impact on Spanish accounts just when they had managed to return to that 3% limit. Now, the Executive does not contemplate meeting that deficit obligation again until 2025, when it is expected to reach 2.9%. Meanwhile, the debate is open in Brussels on the objective of the stability rules, although there are voices that already advocate recovering the limits on fiscal imbalances after the pandemic.

Although sibylline, the threats of austerity in situations of imbalance have reappeared. The ECB returned to refer to deficit control when he presented last week the new mechanism to control the risk premiums of the euro countries, especially those of the south. The requirements to be able to access the TPI, as has been announced, include that the states are not in a situation of excessive deficit.

For now, the Government has found an ally to be able to redirect public accounts: tax collection. The improvement of the economy and inflation have meant that, without having approved large measures to increase income and despite having launched reductions in the electricity bill, the collection figure has reached record levels. Last year saw the highest number of tax revenues in history and, so far, growth has remained at a significant level in 2022.

Until May, the latest data recorded by the Tax Agency, the increase in tax collection was 19%. Or what is the same, 13,400 million euros. Thanks to this increase, the Government has already seen the bulk of the cost compensated in just five months of the decrees that have been approved in the face of the inflation crisis.

This, together with the fact that last year ended with a lower deficit than expected, has given room for maneuver for aid plans. The new taxes announced by the Government are called to help this margin. The tax on extraordinary profits to banks and electricity companies is expected to give the State 3,500 million euros.

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