How Spain’s politicians are waging a tax war ahead of 2023 elections

With general elections a year away, the battle lines have been drawn between Spain's left-wing government and its right-wing regions, who are tripping over themselves to unveil lower tax policies.

spain tax war
Andalusia's right-wing presidents (left in second image next to PP leader Feijóo) has thrown a spanner in the works by recently announcing that he would scrap wealth tax in his region, a decision that Spain's tax minister María Jesús Montero (seen next to Spanish PM Pedro Sánchez) has called unfair for the country's other regions. Photos: Pierre Philippe Marcou, Julio Muñoz/AFP

On the back burner for months, the tax issue hit the headlines last week after the leader of the southern Andalusia region decided to axe wealth tax and lower income tax in a bid to attract wealthy taxpayers.

“We were a tax hellhole but now we’re the region with the second lowest taxes in Spain,” boasted Juanma Moreno of the right-wing opposition Popular Party (PP) — his region trailing only Madrid, which is also held by the PP.

As one of the Western world’s most decentralised nations, Spain is divided into 17 regions, whose governments have considerable autonomy and are responsible for budget management.

Moreno’s remarks opened the floodgates, with many other PP-run regions announcing cuts, including Murcia, which slashed income tax, and Galicia, which is rolling back its wealth tax.

‘Welcome to paradise’

This flurry of announcements was hailed by top figures within the PP, among them the party’s rising star, Madrid leader Isabel Díaz Ayuso.

“Welcome to paradise,” tweeted this champion of the tax war, who last year repealed some 15 local levies in her region.

But the move has drummed up a storm of criticism within the government of Socialist Prime Minister Pedro Sánchez, which has denounced it as economic populism ahead of regional elections in May and a general election expected in late 2023.

And it has raised concerns about the impact of such measures on public service funding.

Economy Minister Nadia Calviño didn’t mince her words, denouncing such moves as introducing an “irresponsible, incoherent and destructive dynamic that would affect the whole country” and demanding they be reversed.

And Budget Minister María Jesús Montero warned it was “dangerous” to create “tax havens” within Spain.

Even Sánchez weighed in, denouncing what he called “tax gifts to the minority” and pleading for “responsible tax policies”.

“There must be tax reforms that guarantee that those who have more contribute more to the public purse in order to have a much stronger welfare state,” he said.

Tax harmonisation

On Thursday, the government said it would slap an “exceptional” tax on the country’s richest to help pay for measures aimed at easing the impact of spiralling inflation.

And it is in favour of a greater “tax harmonisation” between the regions.

But it’s a sensitive subject in Spain where the Constitution requires a certain solidarity between the regions while also guaranteeing their robust fiscal and financial autonomy on top of extending them wide-ranging powers over issues such as health and education.

“If some regions are lowering taxes, it’s because legally they can,” said Stella Raventos, head of AEDAF, the Spanish Association of Tax Advisors.

“Not all regions have the same policies because they don’t have the same problems.”

But given the risks inherent in a wholesale policy of slashing duties, “a tax harmonisation policy could be a good idea”, as long as it was kept within “reasonable levels” and with upper limits, she said.

For the PP, any such move would be crossing a red line.

If there is any government “interference”, there will be “a robust legal response”, Andalusia’s Moreno vowed, warning against any move to “centralise” fiscal policy.

For now, the government has no plans to encroach on the regions’ autonomy — although it is determined to fight any “fiscal dumping” within the framework of a huge reform package aimed at making Spain’s tax system more just and progressive.

Details of the tax reform, which is required by Brussels in exchange for aid channelled through its post-pandemic recovery scheme, will be released early next year.

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The new tax all workers in Spain will pay in 2023

From 2023, all salaried or self-employed in Spain will have to pay an extra tax to help fill up the country's pension fund. Find out how much it will be and why Spanish authorities are introducing it.

The new tax all workers in Spain will pay in 2023

From January 1st 2023, all workers in Spain, whether salaried or self-employed, must pay a new tax through their social security contribution to help fill up Spain’s pension fund – a move that will affect over 20 million workers.

The Intergenerational Equity Mechanism (MEI), as it’s known, will be a small social security contribution intended to help balance pension financing between generations. 

With Spain’s rapidly ageing population, declining birth rates, high levels of unemployment, the impending retirement of the baby boom generation and seriously scarce pension reserve funds, the Spanish state needs to recoup pension funds quickly in order to ensure the costs of future retirees.

READ ALSO: Older and more diverse – What Spain’s population will be like in 50 years

It is hoped that the MEI will bring in around €22 billion by 2032, when it is anticipated the new tax will be lifted. 

How much will the MEI tax be for contract workers?

The new MEI tax will be paid by all workers regardless of their income, and the percentage they pay on their salary will be the same for everyone.

In simple terms, if you work in Spain and thus contribute to social security, the new tax will represent 0.6 percent of your monthly salary.

However, of this 0.6 percent your employer will pay 0.5 percent and you will only pay the other 0.1 percent.

READ ALSO: Spain’s over 65s exceed 20 percent of the population for the first time

To give an example: say you’re employed in Spain and have a gross salary of €2,000 a month; 0.6 percent of €2,000 equals €12, of which your employer pays €10 (0.5 percent) and you would pay €2 per month (0.1 percent).

How much will the MEI tax be for self-employed workers in Spain?

What about if you’re self-employed a don’t earn a fixed monthly wage?

Autónomos will also have to pay this new tax, and trade unions estimate that the average monthly payment for self-employed workers will be around €5 per month.

It is unclear exactly self-employed workers will pay the tax – whether on their quarterly tax return or in the monthly autónomo fee – but Spanish media reports seem to suggest it will most likely be tacked on to the monthly fee.

READ ALSO: Self-employed in Spain: Do I have to register and pay tax if I earn below minimum wage?