And the Winner is… a Tax Increase!

Víctor Torre. Professor. Instituto de Empresa

26 September 2005

In today’s global economy, applying old remedies to new ailments can often cause harmful side-effects. Such is the case of Spain’s public health system, where the government prescription of higher taxes to finance the growing deficit is likely to fuel inflation, without reducing wasteful spending. Charging users a small sum could be an efficient way to cut back on abuse and curb health costs.

The night of the Hollywood Oscars finally arrives. As the tension mounts, the audience waits with bated breath for the Best Actress award to be announced. The music plays and…..widespread disappointment. The award isn’t bestowed upon a beautiful woman wearing a long, dazzling dress. The guests at the ceremony, and TV viewers all over the world, can’t believe their eyes: The person hobbling up to the stage is grossly obese and older than the hills.

It’s the same old story with the financing of the public health system. First, regional governments announce a serious problem. Then, after a drum roll, it pledges to come up with the great solution, the magic formula. But the character that appears on stage represents the same old recipe of higher taxes. There’s not enough money for health? No problem! Let’s raise taxes and that’ll be that.

Let’s take this one step at a time. Are regional governments suffering from financing problems? If they aren’t, the solution might just require a rearranging of priorities. In order to spend more on health, administrators could save money elsewhere—and those “elsewhere’s” certainly exist. It’s a daily part of every (good) public administrator’s job. Finding additional resources requires deciding where to extract them from the budget.

Let’s just accept for a moment that the matter is more complex—that a financing system had already been agreed upon when regional governments took over management of the health system, and that it hasn’t proven sufficient enough. Did anybody really believe back then that increasing spending on health was really going to halt its frenzied growth? Even if that were the case, is there no formula other than increasing everyone’s taxes to cover growing health costs? I fail to understand why, for example, to pay for cataract operations, we need to raise taxes for beer drinkers or for people who turn on a dishwasher. Wouldn’t it be more reasonable to obtain the euros we need from people who use the public health system? A few months ago, the health minister of the Catalan government floated the idea of paying one euro for every visit to the doctor and she drew heavy criticism for it. Now it seems we are going to get that euro from people who fill their tank with gas-- in addition to the euros they already pay in taxes.

Even if the health system continues to be financed through tax revenues, why should it be ‘completely free’? Free things are never truly appreciated by those who receive them and this type of largesse usually paves the way for all kinds of fraud. Hands up from all those who have never seen an honourable-looking old gentleman come away from the pharmacy with his arms filled with medicine for his whole family thanks to his free prescriptions. Perhaps the health deficit could be alleviated with a small payment by those using the service. Indeed, it might help avert abuse and discourage the squandering of public funds.

The truth is that raising taxes has serious consequences. This has been pointed out by none other than the OECD, whose Director of the Centre for Tax Administration and Policies stated recently that Spanish tax rates were not competitive (see Expansion of August 26). Corporate tax is higher in Spain than in 19 of the 25 countries in the European Union. Does anyone think that companies aren’t concerned about the cost of electricity or fuel---to give just two examples of taxes that are likely to finance the health system? They are not mere technical asides: In its 2004 annual report, the Bank of Spain explained that direct foreign investment in the country last year fell to almost a third of its 2003 level. Of course, the closure of factories under the weight of so-called ‘globalisation’ has much to do with this fact.

Raising taxes not only erodes our competitiveness in the global economy in which we live and work, it also boosts prices. Indeed, when indirect taxes are increased on products such as alcohol, tobacco, electricity and gasoline, inflation also rises. And here the matter is more serious. As Professor Velarde Fuentes pointed out a few weeks ago, our inflation is expected to rise 7% more than inflation in Europe between 2001 and 2006, according to most forecasts. It doesn’t mean that that the price of our products and services is increasing, it means that they are rising much faster (on an accumulated basis) than those of our competitors. So it should come as no surprise that the deficit on the current account of the Spanish balance of payments almost doubled in the first five months of 2005, from the same year-earlier period. (26 .04 billion euros compared to 13.718 billion euros).

One of the greatest errors in politics is to apply old remedies to new ailments. Indeed, the age-old prescription of higher taxes—to use a pharmaceutical reference—is perhaps the one that has the largest number of side-affects. We are perhaps in need of a little imagination. If we apply it on the night of the wonderful Academy Awards, we might be able to applaud a new actress who is, indeed, a promising young star.

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