The OECD calls for direct aid to the vulnerable in the face of widespread tax cuts


New notice from the Organization for Economic Cooperation and Development (OECD) just one month after the Government decides whether it will finally expand, modify or even eliminate some of the measures of the anti-crisis plan with which it has sought to limit the impact of the rise in energy prices in the pocket of families and companies.

In a report published this Wednesday, the institution reviews the measures carried out by the different governments during these months, focusing on those related to taxation. And the conclusion is clear: widespread tax cuts end up favoring families with greater purchasing power than vulnerable ones. For this reason, they advocate limiting measures such as applied VAT reductions or the application of reduced or 'zero' rates of the tax to the maximum, betting on other types of measures "that are directly aimed at increasing the real income of the poorest households and to improve public services for these families.

The institution acknowledges, however, that the application of these direct checks is "often difficult, if not impossible" in practice, "particularly when the system of benefits and social transfers may not be efficient enough to guarantee that households The poorest receive adequate compensation for the impact of a VAT increase on the cost of their consumption basket.

Regarding the support measures applied specifically to limit the impact of the rise in energy prices, the OECD certifies that they have been common in most countries. He considers that they are also the most "visible, fast and easy to implement". But be aware that they have a series of disadvantages in the medium and long term. "Indeed, they have a strong negative impact on revenue, tend to be untargeted, and their benefits may accrue disproportionately to large energy consumers, who are often the top earners," they warn.

In the same way, it considers that the aid applied by some countries also limits the incentives for energy saving, as well as the abandonment of fossil fuels, "in addition to discouraging new investments in infrastructure" necessary for the energy transition.

fuel bonus

The OECD thus joins other national and international organizations that have been warning for months about the impact of maintaining some of the protection measures against the crisis in a general way. In the Spanish case, one of the most debated is the bonus of 20 cents per liter of fuel, which is expected to be modified by 2023 to limit it to certain professionals (carriers) and vulnerable families.

The Executive must also decide whether to maintain the general reduction in electricity VAT, which has dropped from 21% to 5%, in addition to other measures such as the reduction to 0.5% of the Electricity Tax rate and the suspension of the tax at 7 % to generation, with an economic incidence that exceeds 10,000 million according to government calculations.

To do so would be in breach of the OECD recommendations, whose report also criticizes the application of reduced or zero VAT on other types of essential goods and services. They consider that this measure, which governments generally apply with the excuse of achieving greater equity, ends up having an effect contrary to the desired one, by benefiting higher-income households to a greater extent.

The explanation is simple. The OECD indicates that, for example, the reduced VAT on products such as some supplies or basic foods - which account for a large part of the budget of lower-income households - "results in an inefficient distributive tool", since wealthier households tend to benefit more of the same in absolute terms, since they tend to consume more.

The institution thinks the same about the preferential rates that have been introduced to stimulate employment in some sectors such as tourism and hospitality, or tax reductions to encourage culture.

In this sense, the institution insists on the need to "provide specific support" through other formulas, such as income tax or through transfers and benefits, "which tend to be more effective measures in terms of equity."

In any case, Spain is the eleventh country of the 38 that make up the OECD in which consumption taxes have less weight with respect to the total collected. Specifically, they accounted for 24.5% of the total taxes collected in 2020, the last year with available data. The data represents a drop of 2.2 percentage points compared to 2019. This bulky change is partly due to the impact of the Covid-19 pandemic.

If only VAT is taken into account, in Spain it accounted for 17.1% of total tax revenue in 2020, compared to an average of 20.2% in the OECD.

tax pressure

The OECD also released its annual report on tax pressure this Wednesday, which once again leaves Spain as the leader among the large economies in this concept that measures the relationship between taxes and Social Security contributions with the size of the economy.

Specifically, last year the tax burden in Spain increased by 1.7 percentage points to 38.4%, compared to the increase of half a percentage point for the group of more developed economies that on average present a weight of taxes on GDP of 34.1%.

According to the data compiled in the report, the increase in the tax burden in Spain during 2021 was the sixth largest among the 36 countries for which data was available, behind the increase of 3.4 percentage points registered in Norway; of the 2.8 points in Chile; the 2.6 percentage points in Israel; 2.2 whole points in South Korea and 2 percentage points in Lithuania.

Since 2000, the tax burden in Spain has increased by 5.4 percentage points, from 33% to 38.4% in 2021, above the increase of 1.2 percentage points observed on average among OECD economies, where the tax/GDP ratio was 32.9% in 2000, compared to 34.1% in 2021.

On the other hand, taking 2020 as a reference, the OECD estimates that the greatest weight in Spain's tax revenue corresponded to Social Security contributions, with 37.4%, compared to the average of 26.6% for the OECD, while taxes on the income of individuals accounted for 23.7%, compared to 24.1% on average in the organization.

In the case of corporation tax, the weight of this tax in tax collection in Spain was 5.3%, compared to the 9% average for the OECD, while the contribution of property taxes in Spain represented the 6.7% of income, compared to the 5.7% average in the OECD.

For its part, the contribution of VAT stood at 17.1% in Spain, below the 20.2% of the international organization and the weight of other taxes on consumption was 9.6%, compared to 11 .9% of the OECD average.