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Spanish Leader Warns Rich to Expect Higher Taxes
20 May 2010 @ 16:21

MADRID — Spain’s prime minister opened a new front Wednesday in the fight to reduce the country’s bloated budget deficit by warning the rich to expect higher taxes.

The plan outlined by José Luis Rodríguez Zapatero came on the eve of a ministerial meeting during which the government is expected to finalize a slate of additional spending cuts worth €15 billion, or $18 billion.

These cuts, which Mr. Zapatero announced to lawmakers only last week, include an average salary reduction of 5 percent for civil servants. That proposal has already prompted Spain’s main labor unions to call a strike next month.

Mr. Zapatero said Wednesday that the timing was not decided, but that the tax increase would in any case be “limited” and not cover all forms of taxation. He also promised to spare middle-income taxpayers.

Spain currently has a maximum marginal tax rate of 43 percent. Even though Mr. Zapatero did not elaborate Wednesday on his tax plans, economists suggested that, besides raising the income tax, the government could also introduce other measures, like a new inheritance tax, or make a U-turn on a wealth tax that was abolished in 2008.

Mr. Zapatero reiterated his call to Spaniards to make a collective effort to help pull the country out of economic crisis, but he said the effort “should in the biggest part come from those who have more, obviously.”

“I could add from those who really have and not from the middle class, which already bears a large part of the fiscal efforts of the country,” Mr. Zapatero said.

The main opposition Popular Party, however, was quick to question the validity of the tax initiative, as well as whether it would be limited to the wealthiest.

“Let us see whether the big middle class of this country will not again be the one hurt by the policies of Zapatero,” said María Dolores de Cospedal, secretary general of the PP.

Another senior politician from the center-right opposition, Cristóbal Montoro, warned against a counterproductive tax increase that could instead put a brake on economic growth. “What we need in Spain is for state revenues to come from economic growth and job creation, but this is incompatible with a tax increase,” he said.

The publication of final growth figures Wednesday confirmed that Spain had come out of recession in the first quarter, with growth of 0.1 percent compared with the previous quarter. Still, Spain’s economy contracted 1.3 percent year-on-year in the first quarter.

Economists, however, suggested that some further measures were inevitable, given that Spain needed to cut a deficit that reached 11.2 percent of gross domestic product last year, the third highest among the 16 countries that use the euro.

Furthermore, by targeting the rich, Mr. Zapatero might be looking to strengthen support among his own Socialist party members and deflect some of the union-led opposition to his spending cuts, which will also reverse previous benefit pledges for retirees and newborns.

“There is an economic issue, because there is a need for more action since none of the needed adjustments were made in the last two years,” said Xavier Vives, an economics and finance professor at the IESE business school in Barcelona.

“But there is also a political issue,” Mr. Vives continued, “and there I believe Zapatero has little other remedy than to go after the rich to counter the perception that what has been announced so far has been unjust.”

Still, Mr. Vives said that drip-feeding announcements like an unspecified tax increase would do little to improve the government’s credibility. “It looks like the government is responding to external shocks and external recommendations instead of taking the initiative with a coherent package, so in effect it is still just trying to cope rather than lead the way out of the crisis,” he said.

Source: New York Times

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