Changes in tax residence in the search for more advantageous taxation increase inequalities because they reduce the “redistributive capacity of governments.” The latest IEB Report (prepared by the Institut d'Economia de Barcelona-UB) analyzes the consequences that changes in the tax domicile of taxpayers with high incomes have for the economy.
Mathilde Muñoz, professor at UC Berkeley and NBER researcher, explains in a study that the 50% of the population with the lowest incomes “lose out in tax competition and would always be better off in a federal union.” The author's estimate is that “their loss of well-being ranges between 10 and 20% on average, depending on redistributive preferences.” On the other hand, taxpayers who leave “benefit from tax competition, because their taxes go down with the mobility caused by taxation when countries enter a regime of tax competition.”
The analysis is based on tax competition between states, although the cases may be similar within the same country, as is the case in Spain. Isabel Z. Martínez, researcher at the KOF Swiss Economic Institute at ETH Zurich, analyzes what happened in the Swiss canton of Obwalden when in 2006 the regional government modified decreasing tax rates with the aim of attracting high-net-worth taxpayers. “The reform did not increase income,” the economist says in an article. “Total tax revenue in Obwalden increased over time, but income tax revenue in other cantons still increased more in comparison,” she maintains. In the same work and citing a previous report from 2010, Martínez recalls that “tax differentials in Spain motivated migratory responses that were not sufficient to compensate for the mechanical income losses derived from lowering tax rates.”
Rafael Granell, IVIE researcher, points out that “it is evident that if those with higher incomes leave your community, you have less public income.” And he remembers that transfers of tax domicile are very easy within the same country.
Alejandro Esteller-Moré, professor of Economics at the University of Barcelona and coordinator of the latest IEB Report, explains that “within a country, when there is fiscal competition between two autonomous communities, in the end there is one that loses and another that wins.” Or they can lose both in some cases. What the studies published by the IEB on Switzerland or the United States suggest – adds Esteller – is that the territory that lowers tax rates does not obtain more revenue even if more fortunes arrive because taxes are lowered for everyone. And obviously the territory that loses taxpayers obtains less income as well. “At the level of competition between countries, it can have a positive effect but not within the same State,” he adds.
“Between the autonomous communities, tax competition must exist at reasonable levels, but the problem is when you enter into aggressive competition, as happens at the international state level with countries like Ireland or Luxembourg,” reflects Jorge Onrubia, professor at the Complutense University of Madrid. and researcher at Fedea. In Spain do we have aggressive tax competition? “I think so,” he answers, although he clarifies that there is an “original sin” with the establishment of a wealth tax like the patrimony tax, since it distorts the fiscal strategy of the autonomies. In the economist's opinion, the de facto suppression by some communities such as Madrid or Andalusia of the wealth tax could be understood in a certain way as a fraud of law. “You have an instrument that the Government has given you to complete your income and you put a 100% bonus on it. It is almost a fraud of law,” he points out.
Although that problem has ended after the central government imposed a new tax on large fortunes that is complementary to the Heritage tax. Once the Constitutional Court has endorsed its legitimacy after the appeals of regional governments, the communities where Patrimony was 100% bonused – Madrid and Andalusia – have announced that they will review the aforementioned bonus. It is a move that will reduce tax competition between communities. It remains to be seen what consequences it will have.
