Lessons from Property Tax

 In a time when tax collections are hitting low as a consequence of the economic breakdown, there is one tax that, unlike any other, has steadily grown. How is that possible?

 As has been recently unveiled, in spite of a situation where the economic activity has been severely damaged, Real Estate Tax in Spain is getting more and more relevant, and collects more money now, than it used to do in 2007. It is playing a major role financing local administration, and it is one of the main reasons that keeps them from bankruptcy, as opposed to Autonomic Regions or the central Administration itself. In fact, it works so well, that some experts have demanded to transfer this tax to the local administrations, to the central Administration.

 However, I would like to stress one characteristic of this tax: it is very difficult to evade.

 This can be explained due to the essence of the tax, since it is reasonable easy to levy real estate property: you know it is there, and it is not going to vanish to a tax haven destination. Also, we should mention the Spanish Cadastral Office: although it has been said that it should be merged with the Property Registry (something that may eventually happen) it works reasonably well, and has been a key part of Spanish economic life over two centuries.

 Two lessons can be taught from the Property Tax:

       - Taxes are taxes, and the citizen’s duty is to complain about how high they are, and eventually pay them. But property tax is not among the most unpopular taxes, its taxable event is considered rather fair –there are few expressions which show economic capacity stronger than owning real estate assets-, and their rate, in spite of recent increases, is not considered abusive, like in VAT or Personal Income Tax, but it is usually ignored.

      - The key of its effectiveness seems to lay on its “reliability” and simplicity. Evasion is marginal, and that allows to keep the rate low. This is also a distinctive sign of fairness, which is perceived by the taxpayer.

How can we apply all the abovementioned to the tax system, or more specifically to the Personal Income Tax and Corporate Tax? Note that the collection of those two was about 9 times higher than the Property Tax collections (2009).

 Essentially, both aforementioned taxes are harder to audit; something which was easy in Real Estate Tax, now it can only be achieved by increasing personal and technical resources, but putting aside some collection-related incentives for auditors, something which can be tricky. Also, keeping the Tax Office away from political interferences and corruption (basically they are the same thing) is something that has to be done, specially after the last scandals involving the Royal Family and, besides this the Cemex issue.

 This should be done by fewer, simpler and more comprehensive laws. At the same time, this would benefit the fairness of fiscal law; we all know that specific provisions for a determined field or economy sector, are in many cases, a battle won by lobbies.