Are taxes leading us to a demographic winter?

Víctor Torre. Professor. IE Business School

20 June 2006

The Spanish population is getting older everyday, while families fail to have enough children to replace the working population. Do the tax breaks for families in Spain provide a real incentive to have more children?

How immediate is Spain’s demographic problem?

One of Spain’s most serious mid to long-term problems is its aging population. According to Spain’s National Institute of Statistics, by the year 2046 about 33% of the population will be over 64 years old, compared to only 17% today. These figures already take into account the considerable impact on Spain of the immigrant population. Spain is facing a demographic winter. Spending on public pensions is expected to double by mid- century, to about 18% of Gross Domestic Product or GDP.

Spaniards are having too few children and failing to replace the working population. What is more, we are living longer and thus are heading towards a society of OAPs (old age pensioners). A shrinking work force will have to support the increasing pension and health care needs of this growing elderly population. Although the influx of immigrant workers alleviates the problem to some extent, it is not enough to avoid its tremendous consequences.

What have governments done to help?

In recent years, governments of all colours have shown concern for the continual aging of the Spanish population and have attempted to take measures to counter the situation. Unfortunately, these measures have been nowhere near sufficient. All of us can remember the government’s attempts to reconcile family and professional life, which included payments to working mothers with children under three, measures in favour of a later retirement age, legislation supporting large-families and the continuous debates about extending paternity leave.

However, the greatest costs incurred by the government have been from tax measures. There have been attempts to help families with young children through income tax deductions. This is true of the latest income tax bill currently under debate in the Spanish parliament. But with the exception of a few technical differences, this bill follows much the same lines as previous laws. Indeed, some of the reasons given for this new bill mention aging, but only when referring to tax incentives for private pension schemes.

An alarming report for Spanish families

There is no doubt that tax breaks for families with children is an incentive to have more offspring. Indeed, it makes sense to start with those families who live only from what they make. Without a doubt, salaried workers are the most heavily taxed workers in Spain today. This is especially true when salaries are compared with the income earned by professionals or entrepreneurs or income earned through savings. The OECD (Organization for Economic Co-operation and Development) recently published an extensive study on family taxation. The results for Spain are alarming. The study, which was reproduced in Expansión on 30 March 2006, describes two examples. The first is a wage-earner who is single and has no children: His/her taxation in Spain reaches 39% of his/her income, which is 3.1% below the average of the 15 countries that formed the European Union in 2004.

The second example is a wage-earning family with two children and one salary. Their taxes in Spain are higher than the average family with children in the same 15 European countries. Not only do we pay more—we pay as much as 1.8% more. What´s more, the period between 2000 and 2005 shows that the taxes for this type of family fell by 1.5% in these 15 countries of the European Union, whereas in Spain, they increased by 1.3%.

In view of the figures shown in this report, one must really question whether the fiscal policies for families, especially those who live only from their salaries, are truly the best to help Spain fight against the problem of an aging society. It seems certain that a demographic winter is upon us. Is it not time to start lighting the fires?

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