Joy does not last long in the house of the poor. Just two weeks ago, Congress approved the Start-up Law and -even though it could be improved and its approval by the Senate is pending- we were happy about the fiscal modifications that it included in order to attract and retain talent in Spain, reinforce this entrepreneurial ecosystem and promote start-ups as motors of the recovery and modernization of the Spanish economy.

Well, only seven days after said approval, the socialist and Unidas Podemos parliamentary groups presented amendments to the bill for the establishment of temporary energy taxes and credit institutions and financial credit establishments, to introduce the new temporary tax of solidarity of the great fortunes (ISGF). A tax that, in the same way as the wealth tax, expels talent and generates losses and a lack of competitiveness in our economy.

It is a direct, personal and complementary tax of the Wealth Tax (IP) that would tax net worth above 3,000,000 euros and that will be applied throughout the national territory. Regarding the exemptions, the rule would refer -in principle- to the Law on Wealth Tax itself (e.g. family business, habitual residence, etc.).

The accrual would occur on December 31 of each year, and must be settled and, if applicable, deposited during the following months of May and June. Given its temporary nature, if approved, it would be applicable during the first two years in which it accrues. If the law is approved before December 31, the first accrual would occur this year 2022.

The taxable base of the tax would be determined based on the net worth of the taxpayer (i.e. assets and rights reduced in charges and debts), and must be reduced by the exempt minimum (i.e. 700,000 euros).

The following scale would be applicable to the net tax base:

The regulations establish a joint limit similar to that established by the IP Law. Therefore, the sum of the IRPF, IP and ISGF quotas may not exceed 60% of the income obtained in the tax period by the taxpayer (excluding capital gains for more than 1 year). If it is higher, the ISGF fee will be reduced up to said limit, without said reduction being greater than 80% (i.e. 20% of the ISGF will always be paid, unless it is absorbed -totally or partially- by the IP, as indicated below).

In order to avoid double taxation, the rule will allow the deduction of the IP quota paid or to be paid by the taxpayer.

Our Constitution establishes a tax system whose inspiring principle is economic capacity. This principle justifies the duty to contribute to sustaining public spending and, together with the principles of equality and progressivity, determine the proportion or amount of the contribution. The Constitution prohibits the tax system from being confiscatory, thus establishing a clear limit to its progressivity.

When can we understand that we are facing a confiscatory system? In general terms, it will be confiscatory and unfair when the taxpayer’s effort is disproportionate, in such a way that the work to be done does not compensate for the wealth that will be obtained after the application of taxes. In short, the system is confiscatory when it annuls the will to work to generate wealth by not compensating the effort to be made to obtain it.

In our view, such a circumstance occurs -among other situations- when the taxpayer must contribute in amounts greater than 50% of their annual income by direct taxation (IRPF IP ISGF). This has also been considered, among others, by the German Constitutional Court and the French Constitutional Council.

The configuration of the limits constitutes an absolute disincentive for the owner of the property to obtain income. This disincentive generates the expulsion of talent from our system and, therefore, a loss of opportunities and competitiveness for our economy.

Harmonization on regional wealth taxation

Since no one can escape it, in practice – given the double taxation correction mechanism with respect to IP – the rule will affect those taxpayers who reside in Autonomous Communities where the IP is subsidized (i.e. Madrid or Andalusia); thus harmonizing – even temporarily – the situation between the different Autonomous Communities.

This interference in the regional fiscal policy could have as a reaction to legislate for the purposes of the Wealth Tax in order to keep that collection in the Autonomous Community (i.e. Madrid or Andalusia) -as will happen with those that have said tax operational-, offering it back to the taxpayer in multiple formats.

In any case, we are faced with a wealth tax that we understand should be eliminated, especially taking into account that all taxpayers have already paid taxes -whether by IRPF or ISD- at the time of obtaining the income that allowed them to acquire the assets or at the time when you purchased it directly.

As Ludwig von Mises said: “Every specific tax, as well as the entire tax system of a nation, invalidates itself above a given tax rate.”