Catch-22: How Spain´s tax laws are unfit for purpose

Spanish tax laws are changing- and it´s about time. If Rajoy is serious about easing unemployment, he needs to stimulate growth through a complete system overhaul 

Every day, my neighbour Alfredo sits under the fig tree outside the village bar, cutting off the plastic from used electricity cables with care and attention. They pay 1.50eu per kilo for the copper wire inside, he tells me earnestly.

I moved to a sleepy hamlet in rural Andalusia, Spain, two years ago. Back then, the recession was not yet a social catastrophe and most still had jobs. Now, crippling austerity measures and tax increases have deepened the crisis to such an extent that only a handful of this tiny village´s 274 residents are working. Official figures show 42% of the active population here (and 65% of young people) are registered unemployed, compared to national figures of 27% and 57% respectively.  But real figures could be much higher, since many families are no longer (or never were) entitled to social security.

Alfredo is one of thousands of others who can´t claim government help because was always paid cash-in-hand. He has a three year-old son and a partner who lost her job as a care assistant during Rajoy´s brutal public sector cuts, and theirs is one of two million Spanish households without a breadwinner. The middle class is shopping in Lidl while those who fell off the bottom rung of the social ladder a long time ago are scavenging in the dustbins outside. His story is typical: a recent report showed  Spain´s black economy is worth 20% of its GDP.  But why is tax-free work so widespread, even among expats who would never do ´this sort of thing´at home?

It´s all too easy to blame it on corruption and dishonesty, and of course that exists too. But most of the time it´s simply a case of survival, and more now than ever. Many small companies refuse to hire on the books simply because staff social security payments are excessive.  Getting your head around the bewildering myriad of different taxation contracts and categories is a headache-inducing task, but let´s look at the cheapest possible option for construction: to employ someone on the minimum wage for just 12 hours a week, you´d be paying taxes of 87.73eu per month, 39% of their salary. Bar owners could pay 90eu per day plus wages, and whether your business is sinking or swimming is neither here nor there- unlike the British PAYE rules,  fees are calculated on bizarre factors like as the length of the bar and how many tables you have.

The system isn´t kind to self employed people either, who must pay a minimum of  256.72eu per month starting from the day they start working for themselves. It´s true that rebates are given at the end of the tax year, but that doesn´t help millions of flailing businesses or my Spanish boyfriend, who has some great rural tourism ideas but no savings or income to fund his first 12 months of trading.

All this creates a catch-22 situation where people are often forced to choose between illegal work or no work at all.  Spanish tax laws are so notoriously rigid, bureaucratic, complex and inefficient that they actually encourage black market employment, as well as stifling growth and innovation.

To its credit, the government has taken a big step in the right direction with its ambitious Strategy for Youth Training and Employment, a four-year plan costing 3.5bn eu and funded mainly by the E.U. The so-called ´100 measures´ include tax breaks for young freelance workers and lower social security payments for up to three years for companies that hire young workers. The  ´launch network´ allows entrepreneurs to claim unemployment benefit for the first nine months of starting their business, and there are also initiatives to help unemployed people over 45.

Rajoy doesn´t want to talk about allegations he and other members of the ruling PP party took illegal payments over a 20 year period in exchange for contracts, but he was happy to make a declaration that ´green shoots´ are appearing in Spain´s economy as a result of his plan. According to the the government, this year 20,500 new entrepreneurs were created and 62,000 fewer kids were kicking around wearing the lost generation label.

Impressive, right?  Maybe I´m cynical but whilst the measures are useful, they offer short-term solutions, don´t apply to everyone, and are mind-bogglingly and unnecessarily numerous (in addition to the 100 presented measures, there are a staggering  two million planned for the future). And with McDonald´s benefiting from lower labour costs to make 600 ´corporate scholarships´(shudder), you have to question whether thousands of bright young things reduced to flipping burgers is not the start of a positive future, but rather the death knell of it.

Besides that, the unions are right-  these measures can only have a limited effect while crushing austerity continues. Even Spain´s ex- President and fellow PP member José María Aznar attacked Rajoy´s VAT and tax increases, insisting cuts are needed to stimulate growth. In my area the new hospital sits unfinished and abandoned, while hundreds of builders twiddle their thumbs and nurses like my friend Susi are forced to migrate for work. Wouldn´t it make sense to spend some of that 3.5bn eu on rebuilding Spain´s fractured public services and generating jobs that way?

Bu maybe there´s still hope for Spain´s 6.2m unemployed. This month, a committee for the reform of Spain´s tax laws met for the first time, announcing an overhaul of the current legislation by March 2014. Now is the perfect opportunity to modernise an archaic system, designed in 1973 for Spain´s transition to democracy and now totally unfit for purpose.

The people desperately need a similar model to the UK, in which taxes are affordable, fair, and based on earnings. This would mean less risk in starting a business, fewer employees forced to accept black market work, and crucially, more people paying taxes- with more money in their pockets to boost the economy.

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