Confiscatory Taxation: Spain Raises Value Added Tax To 21% By September 2012

It’s Madness

Given the dire economic conditions, it’s insane to raise the value added tax from 18% to 21%. That is a 17% increase. Only two years ago, in July 2010, the previous, socialist government raised it from 16% to 18%.

Spain’s government justifies such an increase with the absurd argument that they are only bringing their VAT tax rate in line with the rest of the European Union. Yes, it is true the VAT tax rate in Germany is 19%, in France it is 19.6%, and in Italy it’s 21%. However, this is typical big government absurdity, when my neighbor raises taxes then me too. By this twisted logic we soon would see VAT tax rates in the 30-40% range. If businesses in the EU would do this kind of price fixing, they would be suit.

Confiscatory Taxation And The Laffer Curve

The top personal income rate is 43% in Spain, the corporate tax rate is 30%. Thus, besides high VAT taxes, Spain is a high tax country.

To use an exaggerated and oversimplified example, the average Spaniard employee pays about 30% in income taxes and soon 21% taxes on everything he or she buys. That is a combined taxation of over 50% of hard earned money. This example does not even include payroll taxes etc.

Any taxation that reaches or exceeds 50% of one’s income is legalized confiscation or theft by big government. Laffer curve analysis strongly suggests that revenue will rather decline in such a high tax environment. Citizens are no fools.

Revealing Exemptions To VAT

I do not know all the details, but the tourism sector enjoys an exemption from VAT in form of a considerably reduced VAT rate of currently 8%, which the new, conservative government now intends to raise to 10%.

Why are there such exemptions like tourism and also for basic foodstuff (VAT rate of 4% in Spain)? One easy answer is that big government knows exactly that tax rates as high as 20% are confiscatory and abhorred by the people, not to mention bad for business. Or is it just a clever move by big government to prevent riots in the street?

A Warning For The USA

In the US, we find a lively discussion of introducing some kind of consumption tax. Even conservative think tanks like the Goldwater Institute here in Arizona are in on this misguided policy advice.

To put it very simply, a domestic consumption tax cannot be implemented without abolishing the personal income tax first. Otherwise, our greedy big government politicians see $$$ signs and revenue.