Madrid - Brussels: Europe and the Arabs
Spain is one of only three European countries (along with Switzerland and Norway) that still collects wealth taxes, and policymakers are looking to Madrid to learn lessons about what works and what doesn't.
As advisers across Europe look for ways to repair the damage to public finances caused by successive global shocks, demand is growing for more effective ways to tax the largest private fortunes. According to a report published by the European news network in Brussels, Euronews, on Sunday, under the title:
Solidarity Tax
Spain's wealth tax dates back to 1978, the year that marked the transition to democracy from the Franco dictatorship. Regional governments receive the revenues from this tax, a system that worked well until it was reinstated in 2011 after a brief hiatus during the financial crisis. Upon its reinstatement, Madrid's conservative administration responded by cutting the tax rate to zero. This move benefited Real Madrid's high-earning footballers, and attracted new residents from other regions, as well as expatriates from Venezuela and other Latin American countries, driving up property prices.
In 2022, the southern region of Andalusia, run by the Conservatives, announced it would also cut its tax rate to zero. In a play on the Spanish term "paraíso facilical," referring to a tax haven, the Madrid region's leader posted on X: "Welcome to paradise, Andalusians." Galicia, in the northwest, then joined the fray, offering a 50% discount.
A source of income that provided hundreds of millions of euros annually to support local services, including healthcare, was under threat. The battle to save it became a struggle between the Socialist-led central government, headed by Pedro Sánchez, and the autonomous regional governments run by the Conservatives. At the end of December 2022, Sánchez introduced a solidarity tax on large fortunes, initially for two years to help with post-pandemic public spending. It has now been extended until regional funding is reviewed, which is unlikely to happen soon.
The tax is designed so that any revenue lost by the regions is collected centrally. The rate starts at 1.7% for those with a net worth of €3 million and rises to 3.5% for those with a net worth of more than €10 million. The tax is paid on global assets.
There are allowances: the first €700,000 is exempt, as is €300,000 for the primary residence. A cap on assistance for the asset-rich and the cash-poor means that the combined income and wealth taxes will not exceed 60% of income.
Spanish Treasury figures indicate that in the first year, 2023, the regions collected €1.25 billion, and the central government €630 million; A total of €1.88 billion. In 2024, the regions took the logical step of keeping the income for themselves. The total proceeds rose to €2 billion.
What is clear is that, two years later, the predictions of the rich exodus, promoted in endless alarmist headlines, have not materialized. Forbes magazine counted 26 Spanish billionaires in 2021. This year, it listed 34 of them, with a combined net worth of over $200 billion.
European Moves Towards Wealth Taxes
In the UK, Neil Kinnock, former Labour leader, and Anneliese Dodds, former Shadow Chancellor of the Exchequer, joined those calling on Rachel Reeves to introduce a wealth tax when she draws up her budget in the autumn. While the minister considers the available options, which may also include changes to inheritance tax, members of her party are demanding a parliamentary debate on imposing a 2% annual tax on those with assets exceeding £10 million, which they say could raise £24 billion.
In France, the Chamber of Deputies approved a similar proposal specifically targeting the ultra-wealthy with assets exceeding €100 million, but the Senate rejected it.
Wealth taxes are designed to deduct a percentage of an individual's assets annually. These taxes were previously relatively common, but have gradually declined, replaced by taxes levied when money changes hands, for example, through dividends, inheritance, and the sale of shares or property.
According to the British newspaper The Guardian, cutting public services to fund tax breaks, or simply to balance the books, could lead to a vicious cycle because it weakens the quality of services provided, thereby undermining consensus on taxation. In Madrid, declining healthcare provision has fueled discontent among workers and created a sense that private services are more efficient, while the solidarity tax has helped rebuild confidence.
Spain was the world's fastest-growing major advanced economy last year, surpassing even the United States, with its GDP rising by 3.2%. By contrast, growth in the United Kingdom and France barely exceeded 1% last year.