MADRID – Spain is the third OECD country to collect the most taxes from employees. This is evident from recent data from the Organisation for Economic Co-operation and Development.
A large share of social security contributions
According to the OECD, countries derive an average of 24% of their income from tax. In Spain, it is 23.8%. However, the Spanish wedge – the sum of the IPRF and social security contributions – shoots up due to the share of social security contributions (37.5%). This while the OECD average is 26.4%.
Income and labour are taxed more heavily
The bulk of revenue in the OECD countries (32.1% of the total) comes from taxes on consumer goods, such as VAT. In Spain, on the other hand, VAT revenue does not exceed 26.7% of total government revenue. This shows that the Spanish tax system taxes income and labour more heavily than consumption and possessions.
“Income taxes can cause more economic damage than taxes on consumption and property,” said Daniel Bunn, vice president of the Tax Foundation. This American organisation conducts an annual survey of the most tax-competitive countries in the OECD.
Unlike in Spain, the OECD countries generally rely most on income from taxes on consumption. After that, the income from social security contributions and the IRPF has the largest share. Revenues from corporation and wealth tax account for a smaller share, 9.2%, and 5.6% respectively.
Compared to 1990, OECD countries have on average become more dependent on social security contributions – an increase of 3.1% – and less dependent on the IRPF – a decrease of 6%. “These policy changes are important,” said Daniel Bunn. “Social security premiums generally have a broader base and lower rates. The IRPF often has higher tax rates. This can disrupt workers’ decisions more,” he adds.
Recovery after pandemic
Despite a general decline in corporate rates worldwide, OECD countries have become more dependent on corporate tax revenues. This is due to a change in the composition of the OECD members. Since 1994, 14 countries have joined the OECD. Of this group, Colombia, Mexico and Chile receive more than 20% of their corporate tax income. The average share of this income in the other 35 OECD countries is 7.7%.
“While regular tax revenues have fallen as a result of the pandemic, many OECD countries are already seeing recovery,” notes Daniel Bunn. “As the recovery continues, governments must find a way to increase revenues. They also need to avoid policy changes that could stand in the way of an economic recovery,” Brunn continues.
Higher tax wedge in Spain
Social security contributions and the IRPF represent 39.3% of the salary of the average Spanish worker. The so-called tax wedge is thus 4.7% above the average for the OECD countries (34.6%). For example, the net salary that the employee ultimately receives amounts to 60.7% of the wage costs.
According to OECD data, the higher wedge in Spain is due to high employer social security contributions. These contributions make up 29.9% of gross salary, according to data from 2020. This is compared to an OECD average of 16.3%. Spain is the seventh of a total of 37 countries surveyed with the highest employer social security contributions.
Higher labour costs for companies
“A higher tax wedge relative to other countries, as is the case in Spain, means higher labour costs for companies. This could have negative consequences for the Spanish economy,” specialists from the Spanish Institute of Economic Research (IEE) explain in the White Paper on tax reform. “First, higher labour costs can weaken the competitiveness of the economy. Second, higher labour costs could negatively affect job creation by Spanish businesses,” they add.
Highest incomes most heavily taxed
Furthermore, the highest marginal tax rate of the IRPF in Spain is more than 10% above the European average. The tax bracket for the highest income is 54% in Spain compared to an average of 43.4% in neighbouring European countries.
Of the European OECD countries, Denmark (55.9%), France (55.4%), Austria (55%), and Spain taxed the highest incomes the most in 2021. Hungary (15%), Estonia (20%), and the Czech Republic (23%) had the lowest rates. This is evident from recent reports from the OECD and the Worldwide Tax Summaries from the accountancy firm PwC.