Quebec, Germany, the Basque Country: How do Catalonia's new tax proposals compare?

"Nothing is certain except death and taxes," says the famous quote from American polymath Benjamin Franklin. 

In Catalan politics, there is another certainty. That each election will be followed by protracted and complex negotiations. 

After May's Catalan election, reform of the tax system in Catalonia was one of pro-independence Esquerra Republicana's (ERC) demands in return for supporting the election of Socialist Salvador Illa as president, with a deal eventually reached in late July. 

Catalan News spoke to two economists from the Barcelona Institute of Economics (IEB), Núria Bosch and Maite Vilalta, to find out what the new financing model entails and how it compares to other taxation systems, both in Spain and further afield. 

The problem with the current model  

"The present model has three components," Bosch explains. 

"The first is a basket of taxes, some of which are ceded completely so the Catalan government receives 100% of all the revenue generated, and others where Catalonia has a share." 

"It's a system of tax sharing," between Spain and Catalonia, Bosch says, citing income tax, VAT, and excise duties as examples. 

"Another component is the equalization system, a fund to redistribute resources among Spain's autonomous communities." 

The third and final component is what Bosch calls "adjustment funds," and after their application, a problem arises, she argues. 

"The results are very arbitrary, and Catalonia receives less than it ought to receive." 

Vilalta, who co-directs the IEB's Fiscal Federalism Observatory with Bosch, highlights another issue with the current system: the "overall quantity of resources that is in the hands of the autonomous communities."  

Regional governments across Spain have to fund "a very significant range of public services, including health, education, and social services," Vilalta points out, adding that there are "many arguments proving that the current amount is insufficient." 

In summary, more resources are needed for all autonomous communities in Spain, while the redistribution of funds between regions also needs to be fairer. 

The proposals 

The main change included in the proposals laid out in the agreement between ERC and the Socialists is that Spain would "delegate the management of all taxes to the Catalan government," Bosch explains. 

"Then, there will be a contribution to finance the services that Spain provides to Catalonia, and another solidarity payment to the rest of the autonomous communities." 

"Will the changes mean that there will be more financial resources for Catalonia?" Bosch asks. "Well, it will depend on the solidarity payments, and the payment for services provided by the state." 

"We could end up financially exactly the same, while administering all taxes, and that really would be a bad solution," Bosch says. 

The Basque Country and Navarre 

Not all autonomous communities in Spain have the same financing arrangements. The Basque Country and Navarre have a much greater degree of fiscal autonomy.  

"What this model is not, is an economic agreement like the one in the Basque Country and Navarre," Bosch explains. 

"Despite what certain politicians have said, it's different, because in the Basque Country and Navarre, a payment is made to the central Spanish state for the services that the state provides in those territories." 

"The amount is calculated, but in the Catalan agreement, that's not mentioned."  

"Instead, it says that the equivalent contribution will be made by the central government having a share of the taxes raised in Catalonia, which is actually how it works at the minute." 

"This is an important nuance," Bosch stresses." 

Germany, Canada and the UK 

Looking further afield, there are other countries that could serve as a model for Catalonia and Spain. 

"We should bear in mind that German states, or länder, manage and administer all taxes paid by citizens in Germany," Vilalta says. 

"If we were German citizens, we would pay taxes to our state, and they would oversee the transfer of an agreed amount to the federal government. We could say that it is the individual states who have the key to managing taxes." 

"Does this happen everywhere?" Vilalta asks. "No, because each country has its own system." 

"For example, in Canada, tax administration is not in the hands of the Canadian provinces, except for Quebec."  

Bosch add: "Quebec has a specific model, which is related to the general model that Canadian provinces have."

"Scotland also has a specific model, even though the United Kingdom is not a federal country," she says. 

In Spain, "we would be looking at something similar, an asymmetrical system, which in fact already exists because of Navarre and the Basque Country, and now, Catalonia too." 

But the University of Barcelona professor points out one significant difference with Catalonia. 

"Perhaps the most important difference is that in these federal countries, there is a kind of overlap of taxes," Bosch says. 

"For example, in Quebec, there is the Quebec provincial tax and the federal tax. There are two taxes." 

"On the other hand, here there would be only one single tax, with its management transferred to the Catalan tax agency." 

"The Basque model, by the way, is unique around the world," Bosch notes. 

"Federal governments always collect taxes in each region too. And here, the agreement says that Spain will continue to take a share of taxes raised in Catalonia, so Spain will have sovereignty over its share of tax, as would Catalonia." 

'Tax autonomy compatible with fairness' 

The application of the new tax model in the ERC-Socialists deal will not be simple, especially given the timeframe laid down – implementation by 2026. 

There are serious logistical challenges; the Catalan tax agency will need much greater resources. 

And there are political challenges, as it will require a change in the law which must be approved by the Spanish Congress in Madrid, where a majority in favor is far from guaranteed. 

The aim, Vilalta says, is to get closer to "the common feature of a federal model: making tax autonomy compatible with fairness."