Spanish Parliament Puts Brakes on Government's Tax Reform Plan

The Spanish government on June 24 unveiled a package of tax reforms as part of its push to reduce the deficit caused by the economic downturn and to increase government spending. President Jose Luis Rodriguez Zapatero said the government is seeking to reduce the deficit to 3 percent by 2012. The announcement came after Zapatero's Spanish Socialist Workers' Party (PSOE) agreed with smaller left-wing parties to propose formulas to modify the tax burden on high-earning taxpayers.
A few hours later however -- after failing to reach agreement in the parliament on a spending cap -- Zapatero said the tax proposals will be put off until the 2010 budget negotiations planned for this fall. He did not specify how the reforms would affect different income levels.
The same-day back-pedaling was a result of the PSOE's failure to agree on a spending cap (debated in the parliament that same day) with the aforementioned left-wing parties. The timing of the tax reform also was changed in response to pressure from the conservative Catalan nationalist party, Convergència I Unió, which had resolved to abstain from voting on the Spanish spending cap unless the government committed to further analyzing the tax reform (stopping, at least for now, a previously announced tax increase).
A few weeks ago, the government increased the taxes on cigarettes and gas. The government has also announced that it is considering abolishing two tax credits that benefit individual taxpayers: a €400 tax credit it approved on April 19, 2008, for professionals, the self-employed, taxpayers with employment contracts, and those receiving a retirement pension; and the €2,500 tax credit (the so-called baby check) taxpayers receive when they have a baby.
The government is also considering measures such as increasing the progressive personal income tax rates, the fixed personal income tax rate on savings (currently 18 percent), the VAT rate (one of the lowest in the EU at 16 percent), energy taxes, the vehicle tax, and the tax on alcohol. The only tax the government seems to be excluding from the reforms is the corporate income tax.
It is clear that the PSOE is in a weak position in the Spanish parliament and must reach agreements with other political parties. This makes it difficult to predict the content of the government's tax policy for reducing the deficit.
The left-wing parties want to increase taxes on high-income earners while the more right-wing parties, such as Convergència I Unió, would prefer to cut spending, reform labor law, and freeze tax increases. The right-wing Partido Popular generally agrees with the strategy endorsed by Convergència I Unió.

Source: taxanalysts.com