The drop in corporate tax collection is a defining element in the increase in inequalities in Spain in recent years. This is one of the conclusions of the report Income Inequality and Redistribution in Spain: New Evidence from the World Inequality Lab Methodology, prepared by a group of experts for the Center for Economic Policies EsadeEcPol.
Large companies paid less taxes the year before the pandemic despite earning 16% more
In this research, directed by Clara Martínez-Toledano, professor at Imperial College London and senior fellow in Inequality and Taxation at EsadeEcPol, the evolution of the composition of taxes in Spain is monitored from 1980 to 2020. In this way, indirect taxes (taxes on products) represent approximately 50% of the total throughout the entire period, and direct taxes (income tax, corporation tax, property tax, etc.) the other 50%. The most important direct tax is personal income tax, which represents around 30-40% throughout the period, followed by corporate income tax, with only 8-18%. Property taxes have progressively increased their weight from 1980 to the present (from 2 to 6%), largely due to the growth of investment, mainly in the real estate sector, as explained in the report.
However, Martínez-Toledano points out that "Corporate Tax collection as a percentage of national income is today lower than it was before the start of the real estate boom". Personal income tax has gained weight since the 2008 crisis while corporate income tax has lost it, the importance of the latter currently being even less than before the real estate boom of the 2000s, and that of personal income tax greater. "These changes in the importance of taxes with respect to national income and in their composition can profoundly affect the progressivity of the system."
“While the richest 0.01% paid taxes worth 29% of their income in taxes in 1999, this percentage increased to 40% in 2007, to fall again to 27% in 2019. This is due mainly due to the increase and subsequent loss of revenue from the Corporation Tax”, is detailed in the report.
In fact, the Esade research points out that "income inequalities were reduced during the years of the real estate boom, but have increased since the outbreak of the financial crisis in 2008, fundamentally due to the increase in unemployment, the cut in salaries and to the growth of financial income among the highest income groups. The share of the top 1% earner in national income has increased from 13% in 2007 to 17% in 2019.”
The professor at Imperial College London dismisses the theories that some experts justify the drop in income in recent years from the Corporation Tax, pointing out that "in 2008 the collection was artificial because the companies were generating many profits, although they finally collapsed". Martínez-Toledano clarifies "that collection is lower than before 1999" and stresses that "progressivity is falling because the design of the tax system is different."
In this sense, he advocates reforming the Corporation Tax "in such a way that the collection rises again to levels prior to the real estate boom", although he does not want to give specific recipes, he points out that it is evident that it has to be with "an increase in rates and a reduction of exemptions that companies may have”.
But another of the discoveries of this research is that “taxes and transfers correct inequality, but they are not enough, because a great source of inequality appears before distribution. There are other forces that generate inequality and not only tax policies must be made to correct this situation, I am referring to pre-distributive policies”, adds Martínez-Toledano.
In fact, the report finds that "the patterns of inequality do not vary substantially through the redistributive action of the State", among other things because "the progressivity of the tax system has fallen since the financial crisis of 2008". In this way, although "the poorest 50% benefit to a greater extent from redistribution as of 2007 than the intermediate 40%, mainly due to the greater loss of income before taxes and transfers between the groups with the lowest income", the reality is that of the total income “the poorest 50% goes from 14% to 17% before and after redistribution” of taxes.
“The poorest have lost a lot of income before taxes because they suffer more from unemployment and wage cuts. With the redistribution of taxes, they benefit a little more than 40% of intermediate incomes, but it is basically because they start from very low. What is clear is that the richest 1% have benefited the most, which has gone from having 13% of the national income in 2007 to having 17% in 2019”, explains the EsadeEcPol researcher.
In this sense, the research aims to "improve educational policies to close educational gaps, as well as move towards reducing high unemployment and temporary employment to improve the income of middle and low incomes"; modifies the production model to "promote investment in sectors in which Spain has a comparative advantage, such as, for example, the renewable energy sector, as well as design policies that allow traditional strategic sectors, such as tourism or agriculture , generate greater added value via, for example, new technologies”.
In addition, the researchers propose “measures that guarantee affordable access to habitual residence, such as social rental, that allow reducing levels of indebtedness and increasing the savings rates of households in the lower part of the distribution. Likewise, policies that focus on helping to diversify the savings of the middle and lower classes not only in non-financial assets, but also financial ones, would allow these groups to increase the profitability of their assets and thus generate greater capital income”, to which should be added "an improvement in financial education during compulsory education and/or an increase in the participation of workers in the capital of their companies".