Spain Needs Tax Reform To Lower Unemployment

December 21, 2010 Taxation in Spain

107:365 Spanish FlagA new report on the economic condition of Spain has been released, recommending several changes to the tax system aimed at ensuring a strong and sustainable economic recovery.

On December 20th the Organization for Economic Cooperation and Development (OECD) released its annual Economic Survey of Spain, which outlines the country’s economic standing and suggests several steps that could potentially improve future growth prospects. The report stated that throughout the financial crisis, Spain underwent similar economic declines as other developed nations. At the same time, the country is now experiencing unusually high unemployment levels, which are hampering the financial recovery. The unemployment figure is estimated to heave peaked this year at a level of 20 percent .

According to OECD research, the unemployment level will remain high for several years. Unemployment is expected to drop marginally to 19.1 percent in 2011, and 17.4 percent in 2012. In order for the Government to maintain adequate tax revenue levels, the OECD is advising that Spain must now shift its taxation focus away from corporate and personal income taxes. The report also pointed to the fact that the Spanish Government currently holds a 9.2 percent budget deficit.

The OECD claims that the taxation system in Spain is currently too focused on corporate income taxes and personal income taxes, which were classified as labor taxes for the purpose of the report. It was suggested that the Government might experience greater revenues and sustainability in future economic growth if greater focus was given to consumption and property taxes, as labor taxes are too closely tied to the employment levels.

Spain’s aging population is also a concern for the OECD. The Organization recommended that measures be taken to ensure that tax reforms be carried out to minimize upcoming pension system costs. It was encouraged that a gradual increase to the legal retirement age be implemented, alongside tax penalties for early withdrawal from the labor market.

It was also advised that entry requirements for youth’s upper secondary vocational training should be eased, in order to quickly fill shortages in skilled labor. Additionally, greater incentives should be given to unemployment benefit recipients.

Photo by GonchoA