Within the OECD, after Slovakia and South Korea, Spain’s tax burden has increased the most in the past 10 years. The tax burden measures the weight of taxes and social contributions on the economy. Between 2010 and 2021, the indicator rose 7.1 points to 38.4% of GDP. Before then, between 1965 and 2020, the average tax burden in the OECD region rose from 24.9% to 33.6%, an increase of 8.7 points.
In 2020 – year of the pandemic – and 2021 – with a strong recovery – Spain saw a notable increase. Spain ranked sixth among countries where the tax-to-GDP ratio rose the most in this short period, by more than one and a half points, three times higher than the OECD average.
And while the upturn was particularly strong in Spain, there is a general trend. The tax burden has increased in most OECD countries, both over the past decade – from 31.5% of GDP to 34.1% – and between 2020 and 2021 by -0.6 points.
Despite this increase, Spain is still far from the tax burden of major European economies. Denmark still has the highest ratio, with 46.9% of GDP in 2021, followed by France (45.1%). Austria, Belgium, Finland, Italy and Sweden also exceed 40%. At the bottom of the list are Mexico, with 16.7%, Colombia (18.8%) and Chile (19.4%).
The OECD points out that increases in the tax burden are not necessarily due to tax increases. It could also be that GDP grows more slowly than tax revenues. Conversely, if the economy grows faster than tax and contribution revenues, the tax burden falls without the need for tax changes.
In Spain, the tax burden rose most sharply between 2019 and 2021, with an increase of almost four points. This increase has halved the gap with the eurozone average and puts Spain four points above the OECD average. Analysts attribute this not so much to the tax increases approved during this period, which have had little impact on tax collection, but to the impact of inflation, which began to pick up last year, and to the rise of the underground economy during the pandemic, as regular activity was needed to access public support.
There are important differences between countries, also because developing countries with mature markets and different economic models are compared. In Spain, social security contributions are above average, as are property taxes, while corporate tax and VAT revenues are below average.
The OECD warns of the distortions that can be caused by reduced rates – and exemptions – in indirect taxes, especially VAT. The organisation stresses that most OECD countries have reduced VAT rates on a “wide range of goods and services”, which often “pursue different policy objectives”. These include improving equity by reducing taxes on basic needs such as water, food, healthcare or education. They are also used to boost consumption of cultural goods, for example, to promote certain activities, such as tourism in Spain (which has a 10% reduced VAT rate), or to address environmental externalities.
Exemptions and VAT reduction not always effective
‘However, empirical evidence shows that exemptions and reduced VAT rates are not the most effective way to achieve these objectives and may even be regressive,’ the organisation warns in its report Consumption Tax Trends 2022. It highlights how excise duties on certain goods have lost much of their weight in favour of VAT in recent decades. ‘Other measures, such as providing targeted support through income tax and/or transfers and benefits, tend to be more effective in addressing equity and pursuing other policies than increasing tax revenues,’ the organisation adds.
This is because wealthier households benefit more in absolute terms from reduced VAT rates than low-income households because they consume more. This effect also occurs with reduced VAT rates used to ‘boost employment (e.g. in the tourism or hospitality sector), or to support cultural activities (e.g. theatre) or pursue other non-distributive objectives’. In a recent report on the anti-inflation measures of many countries, including Spain, the OECD warned against this effect. The OECD recommended avoiding general tax cuts, especially on energy, and giving preference to initiatives targeting the poorest households. The organisation warned that subsidising gas and electricity prices without differentiation by income benefits more those who consume more, is a burden on public accounts and goes against the green transition by not discouraging energy consumption.