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Spain to slap new tax on millionaires whilst cutting taxes for low earners

Spain will cut the income tax of low-earning households and introduce a new tax for residents whose wealth exceeds €3 million, the latest chapter in the fiscal war being waged between the left-wing national government and its right-wing regions.

SPAIN-INCOME-TAX
"Since we began governing, we have been working to make our fiscal system more progressive, efficient and strong enough to support social justice," Spain's Budget Minister María Jesús Montero said. (Photo by GABRIEL BOUYS / AFP)

The government will reduce the income tax on people earning up to €21,000 ($20,200) per year, or one in two workers, Budget Minister María Jesús Montero told a news conference om Thursday.

At the same time, she confirmed the government will slap a new tax in 2023 and 2024 on residents whose wealth exceeds €3 million to help pay for inflation relief measures.

This so-called “solidarity” tax will affect some 23,000 people, or 0.1 percent of taxpayers, and raise €1.5 billion for state coffers over the two years, she added.

Prime Minister Pedro Sánchez’s government announced last week that it would create a temporary tax on the wealthiest population without giving details.

“Since we began governing, we have been working to make our fiscal system more progressive, efficient and strong enough to support social justice,” Montero said.

The announcement of the tax changes comes as Spain is gearing up for local elections in May 2023 and a general election expected at the end of next year.

Last week, the right-wing leader of Spain’s southern Andalusia region decided to axe wealth tax and lower income tax in a bid to attract wealthy taxpayers.

Within a matter of days, Valencia’s left-wing regional president announced a reduction in income tax for the vast majority of taxpayers in the eastern autonomous community. 

Spain’s Personal Income Tax (IRPF) is a state tax, but half of its collection is controlled by the autonomous communities.

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

Spain is battling a surge in inflation as a result of the fallout from the war in Ukraine and the reopening of the economy after pandemic-related lockdowns.

The country’s inflation rate eased to 9.0 percent in September as energy prices fell, down from 10.5 percent in August, but remains high.

Sánchez has in recent months rolled out aid packages to help households and businesses weather the inflationary pressure, which has soared across Europe due to the Ukraine war.

It has introduced free public transport, subsidised petrol prices and temporarily slashed the sales tax on gas among other measures, in moves that are expected to cost some 30 billion euros — or 2.3 percent of Spain’s gross domestic product.

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TAXES

Spain’s deputy PM proposes freezing mortgage rates

Yolanda Díaz, Spain's Deputy Prime Minister and Labour Minister, has called for a freeze on variable mortgage rates amid news that Spain's biggest banks have enjoyed a bumper year of record profits.

Spain's deputy PM proposes freezing mortgage rates

Yolanda Díaz, Spain’s Labour Minister and the ideological force behind sweeping labour market reforms, has called for a freeze on variable rate mortgages following news that some of Spain’s biggest banks reported billions in record profits last year.

On Wednesday, BBVA reported a 2022 profit of €6.4 billion, the largest profit in its history. Driving this profit, the bank’s interest margin grew by a whopping 30.4 percent, commission income by 12.3 percent, and loans by 13.3 percent.

Banco Santander posted an annual net profit of €9.6 billion, up 18 percent from 2021 and higher than forecasted by analysts polled by financial data firm FactSet.

READ ALSO: Banco Santander posts record profit as rates rise

Given these record-breaking profits, especially against the backdrop of a prolonged cost of living and inflationary crisis in Spain, Díaz has said the government must act decisively to “freeze mortgages” and “moderate profits.”

“The crisis cannot be an excuse to earn more,” she said, adding that the rise in the Euribor rate is “very serious”, with the average increase (estimated to be €258 per month) “impossible to bear” for normal Spaniards.

Euribor is the interest rate most often used to work out mortgage payments and calculate both variable and fixed rates.

READ ALSO: What the Euribor rise means for property buyers and owners in Spain

It is anchored to the interest rate set by the European Central Bank (ECB), and, as we are now seeing, quite responsive to global economic events. By the end of January, the rate had risen to almost 3.4 percent, the highest level since December 2008.

“While the rise of the Euribor will increase the average mortgage payment by €250 per month, BBVA’s profits grow by 38 percent to reach €6.4 billion, the largest in its history. The crisis cannot be an excuse to earn more. Freeze mortgages, moderate profits,” Díaz wrote on Twitter on Wednesday January 31st.

Banks respond

Unsurprisingly, Spanish banks are not exactly keen on Díaz’s idea. BBVA President, Carlos Torres, said “I trust what will happen is that the benefits of a market economy continue to be defended”. 

Torres also tried to remind people of the “negative years” that BBVA has endured, with “many billions of negatives”. 

It remains to be seen how persuasive Spaniards or the Spanish government find this comparison, or whether Díaz’s Twitter idea will translate into policy.

Windfall tax

Díaz’s call for a mortgage rate freeze is in line with the Spanish government’s approach to the excess profits of banks and energy companies. In July, the Spanish government introduced a temporary windfall tax on excess profits in order to fund some of the extraordinary measures it was implementing to help the most vulnerable in Spanish society deal with the cost of living crisis.

The government in July introduced a draft bill to slap a temporary 4.8 percent charge on banks’ net interest income and net commissions in 2023 and 2024 to fund measures to ease cost-of-living pressures. Between the new taxes on banks and energy companies, they should generate around €7.0 billion for the state coffers in 2023 and 2024. 

However, in November the ECB published a non-binding legal opinion that suggested Madrid undertake a “thorough analysis of potential negative consequences for the banking sector” of the tax.

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