In some very big news the government of Andalusia, led by Juanma Moreno and the Partido Popular, has eliminated in one fell swoop the investment-killing wealth tax. This tax on worldwide assets for both residents and non-residents of Andalusia had a chilling effect on the sales of high-end properties and discouraged high net worth individuals from making Andalusia their home. As a result, much investment was lost from the Costa del Sol and went, instead, to Portugal.
It was a bad and counter-productive policy. Let me explain why. The wealth tax, or el impuesto de patrimonio, was actually established in 1977, then suspended in 2008 as the housing crisis was taking hold.
It was reintroduced in the very depth of the devastating economic crisis in 2012 as an emergency measure by the PP national government. By that point, the economy was in the tank and the real estate market was in full meltdown mode. This had also caused a big social revolt in Spain known as the Indignados Movement.
As tax receipts collapsed and unemployment shot up, the government struggled to find revenue sources and thus returned to using the wealth tax as one the tools to do so. There’s no doubt that it brought in some money but it scared away more than it generated.
The Andalusian government, for instance, estimates that in 2020 alone, the loss in tax revenues because of people fleeing the wealth tax amounted to €18 million. That’s just one year. Meanwhile, the tax only represents a tiny proportion of all taxes collected at just 0.6%. Eliminating it will have zero impact on tax revenue from this point of view. What’s more the loss of this revenue will be more than negated by the fact that the region should be able to attract at least 7,000 new high net worth individuals, based on the government’s estimates.
All these people will pay the other forms of tax, such as the IRPF (income tax), VAT, and IBI (property tax).
It’s a bit confusing but the wealth tax is a national tax, however the autonomous communities (Andalusia, Valencia, Catalonia, et al) are free to set the levels, deductions, asset class exclusions – or even whether to collect it at all. In Andalusia the deductible for the tax had been set according to a floor of €700,000 in assets. For non-residents that was calculated based on assets within Spain. If you were a Spanish resident, that floor was calculated on worldwide assets. There were further deductions from this, for instance if your primary residence was in Andalusia, the value of that property wasn’t calculated as part of your assets if it had a value below €300,000.
In other words, if you had a €300,000 house in Marbella, a cottage in Galicia worth €250,000 and assets abroad worth €600,000, only €850,000 would be subject to calculation. The rate applied was progressive, rising with the value of assets held, from 0.2% to 2.5%.
In our example above you would pay 0.2% on €150,000 (850K – 700K), or €300 per year.
That doesn’t seem like very much but for a high net worth individual, with tens of millions of dollars in assets around the world, they would pay substantially more every year and would be paying much of it at the 2.5% rate.
OK, but they’re rich, they can afford it, right? Why do we care?
Well, there’s a few reasons. The first is that it’s unfair that someone has to pay a tax on the same assets over and over again, rather than on new income being generated, for instance. It’s as though you bought a pair of shoes and had to pay sales tax on the original price – every month until you threw out the shoes. The second reason is that you can imagine why someone wouldn’t be happy to pay not only on their income, sales tax on their purchases, property tax for local services, etc. – but then to also have to pay a tax on their assets above and beyond those other taxes.
It like triple dipping. You had to pay a tax on the income you earned, then you paid sales tax on the asset you purchased with that income, and then you paid a recurring tax for possessing the asset that you bought with the income. But perhaps the most important reason is because, regardless of the morality of it, high net worth people will simply go elsewhere where they feel more welcome. And those people bring jobs with them. High net worth people invest in the local economy both through their purchases and through their investments. Can you imagine Marbella without such people?
They have helped to make Marbella the beautiful, luxurious city that it is today. They have helped to preserve the historic character of the downtown, create the festivals, attract great restaurants. The list goes on. Now, thankfully, this disincentive to their investing in the Costa del Sol has been removed. As of September 21 the tax ceased to exist. Or, rather, because this is Spain, it was eliminated through a bureaucratic loophole. The tax will be subject to a 100% “bonificación”, meaning that you will have it all returned to you.
However they do it, it’s a good signal to send. Spain and Europe face a number of challenges at the moment, not least double-digit inflation. Portugal has also aggressively pursued many of the same demographics that have traditionally been drawn to Spain, including wealthy investors, tech workers and retirees. The regional and central governments in Spain need to understand that they can’t rest on their laurels. Spain won’t remain the reigning champion of European tourism and retirement destinations just because it’s beautiful.
The government of Andalusia has given us another tool to be able to attract people who can make an important contribution to the health of our economy and the cultural richness of our landscape.
View full article in Terra Meridiana