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Javier Díaz-Giménez, Professor, IESE, University of Navarra

What do we know about the VAT increase?

Mon, 22 Mar 2010 15:16:30 +0000 Published in ABC (Madrid)

We know that it is a recessionary measure that will discourage consumption - to the extent that the increase is passed on to prices or investment - if prices are maintained and margins are reduced. In either case, employment and production will be reduced. According to our calculations (see s/vatesp.pdf) the VAT hike will cost us about five tenths of a percentage point of annual GDP growth.

We know that it is a regressive measure, which will affect the poor more than the rich. Most of the increase in the tax burden will fall on the poor, the elderly and pensioners. This is due to the fact that consumption accounts for most of the expense of these groups. The tax collection impact will be lower than expected for three reasons: the VAT instructions are reduced when rates increase, the instructions of the remaining taxes -IRPF, companies and social contributions- are also reduced as a consequence of the recessionary effects of the tax, and the VAT increase will increase the size of the underground Economics .

The VAT increase will not improve the external competitiveness of the Spanish Economics . VAT is deductible at customs, so its direct impact on prices should not affect our real exchange rate subject . But it will certainly not contribute to lowering our prices in relation to those of our trading partners, which is what we need to improve our external competitiveness.