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White paper on tax reform: starting point for an essential tax reform

"Taxes should not be 'a price' but a tool to promote sustainable, efficient and fair economic growth"

Wendell Holmes is credited with the phrase "taxes are the price we pay for civilization." That phrase reveals a certain resignation. From a more ambitious point of view, taxes should not be "a price" but a tool to promote sustainable, efficient and fair economic growth. This ambition is what is marked in the White Paper for Tax Reform prepared by the Committee of Experts published on March 4, 2022.

Let's do some history. The Spanish tax system was born from the Moncloa pacts and materialized in the tax laws of 1977-78, establishing the foundations of a modern tax system. A lot has happened since then, and along the way our tax system has been the object of partial reforms that have given rise to a “Frankenstein” system that has become more complex and less efficient.

The challenges that Spanish society is facing now make the reflection exercise carried out in the White Paper more important than ever, and which is a starting point for a holistic approach to tax reform:

  • Fiscal consolidation which has been postponed due to the COVID crisis and the oxygen balloon that the suspension of European fiscal rules and the European Central Bank's debt purchase program have brought about, but which will need to be addressed in a credible and rigorous manner.

  • megatrends as the technological change that generates changes in the composition of the tax bases; climate change, the need to mitigate it and favor the energy transition to meet the EU's climate objective for 2030; and population ageing.

  • Increase in inequality that it is not only a moral issue, but also a drag on economic growth and social and political stability.

In view of these challenges, the authors present a battery of 118 proposals on environmental, corporate, asset taxation, fiscal measures for a digitized economy, personal income tax, VAT, "healthy" taxation and tax fraud. In addition, the authors correctly point out a series of elements to consider in the implementation of the reform, such as: (i) international coordination and cooperation avoiding the application of unilateral measures; (iii) legal certainty and credibility through the announcement of multiyear fiscal program; and (iii) gradualism in the design and implementation of measures with the aim that the reforms do not weigh down the path of economic recovery.

The authors' recommendations pivot on the efficient taxation principles, understood as that which (1) ensures a certain level of public income; (2) contributes to a distribution of income in accordance with social preferences; and (3) it does so at the lowest possible cost, both in terms of distortions and disincentives on the decisions of the private sector, as well as the tax administration.

Without prejudice to the interest of the specific proposals of the White Paper for the large tax figures in light of the principles and objectives set, allow me to close with a brief analysis of those related to the Tax on Tobacco Products. A Pigouvian tax that seeks to correct the negative external social effects derived from tobacco consumption and that, on the other hand, It is the fifth source of tax collection, contributing in 2021 €6.185Mn.

The proposals contained in the White Paper are as follows:

  1. Reduce the difference in final prices between the different types of tobacco through adjustments in the tax, reducing the tax benefit enjoyed by some tasks.
  2. Consider a change in the structure of the special tax on cigarettes, making the specific component the main element of the tax.
  3. Introduce a new tax on the use of electronic cigarettes articulated as a specific tax of €0,15/ml on liquid in general and €0,006/mg on nicotine.

Regarding the first, eliminating a tax benefit that drains revenue and has no health justification would be in line with the objective of public health, neutrality and revenue optimization.

Regarding the second, note that a structural change like the one proposed, (Yo) it is unnecessary in a system like the Spanish one where there is already a purely specific minimum tax that discourages the presence of brands at very low prices, protecting the collection against possible price drops; (iii) would distort competition between brands and companies by benefiting those more expensive products, which would see their tax burden reduced, by sending a signal not aligned with health objectives; (iv) it would not increase collection, but could put it at risk via illicit traffic; (v) would be socially regressive. For all of the above, it would be more in line with the principles of efficient taxation: postponing any tax change until the full recovery of the economy and, in any case, carrying out moderate and predictable updates the specific and minimal component without revolutionary changes in the structure of the tax, in a multi-year calendar that provides predictability for companies promoting economic growth and competitiveness.

Finally, and regarding the proposal to introduce a tax on electronic cigarettes Based on the nicotine content, it should be noted that both efficiency (low tax collection capacity and management complexity), as well as legal certainty and the desirable international coordination, advise postponing the introduction of a tax on cigarettes. until the adoption of a harmonized position within the framework of the revision of Directive 64/2011 on Taxation of Tobacco Products currently under way.

Ana Ramos Gallarin

Head of Regulatory and Tax Affairs of BAT for Spain and Portugal

Originally published in Blog Fide in the withfideinitial

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