A necessary reform

Although I have already discussed this topic in some of my previous posts, I bring back after reading this interesting article from Joaquin Estefanía in El País.

While in Spain the “social contract” implicitly signed between the state and taxpayers during the fiscal transition from the 70’s is being slowly diluted through the current economic crisis: drastic cuts in public spending, declining quality of public services and social benefits, questioning the fairness of our tax system, etc … In other regions such as Latin America, where building citizenship is an ongoing process, this “contract” has been reinforced with democratic consolidation: high growth of the middle class and a growing welfare state, although its efficiency in the short-medium term is still in question (as stated on pages 12 and 13 of this recent World Bank report).

Therefore it is clear that in Spain along with many other EU countries (Greece, Italy, etc. …) as well as in Latin America (hereinafter, LA) these contemporary “social contracts” have to be reformed, as they have currently become obsolete worldwide. With the rupture between the State and the citizen-taxpayer, it is necessary for the political authorities in each country to reflect the new patterns on these agreements.

While Joaquin Estefanía does not explicitly mention the tax system in his article, in my own view the fiscal system (in its dual role: income and expenditure) is one of the key points in the problems and solutions of these new post-contemporary “social contracts” to be defined: the importance of achieving a truly fair and equitable tax system.

The fact is, that in Spain our current tax system is no longer in line with the economic structure (too dependent on PIT), we have a lot of pressure from the EU for a balanced budget and we have a lack of non-tax collection alternatives, while in Latin American countries the main problem lies in a low tax pressure, low quality of public services and usually large sources of non-tax revenues (natural resources, free trade zones, etc. …) which delay the implementation of large scale tax reforms.

In your opinion, where should we go? … Let’s keep thinking!

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