The Pain in Spain

"It's worse here now than under Franco," exclaimed my boisterous abuela. As a Spaniard, she is prone--like the rest of us--to exaggeration, but her sentiment is not far removed from the general feeling across the peninsula.

Spanish citizens spent the last two days protesting in Madrid in front of parliament, getting so raucous at some points that the police fired rubber bullets back into the crowd. The people are fighting back against austerity measures, thought to be the only way to fix Spain's economy during the eurozone financial crisis by the center-right government of Prime Minister Mariano Rajoy. However, the austerity program does not seem to be working. For one, Spain's debt-to-GDP ratio recently hit 75.9 percent. Further, Spain's GDP change has slowed down remarkably since the crisis and has yet to really pick up.

And, of course, the unemployment rate in Spain stands at a critically detrimental 25.1 percent, beating the previous high of 24.6 percent back in July.

Despite the lack of progress, Rajoy's government just announced new austerity measures that further imposes austerity on an already impoverished and hungry people. This new budget for 2013 and beyond includes "taxes on shares transactions, 'green taxes' on emissions or eliminating tax breaks, and even possibly ending inflation-linked pensions." In addition, "Madrid has already said that it wants to claw back a total of more than 150bn euros between 2012 and 2014: 62bn euros this year, 39bn euros in 2013, and 50bn euros in 2014."

So what does this mean? Surely more protests will be in order. Further, Rajoy said that if borrowing costs remain high, he would be 100 percent behind a bailout of Spain--the EU's 4th largest economy. While Spain is not Greece, it surely wishes it weren't Spain right now.

Under-reported, though, is the toll on a typical Spanish family. I happen to be a part of one, and they all live in Barcelona. My uncle Orlando, a public high school math teacher, has seen his salary cut by 25 percent due to a government spending freeze, and he fears a further 25 percent cut in this new budget. Orlando has already moved three times to find cheaper housing that allows him to pay child support payments and to pay for his kids when he has them for certain weekends.

My uncle Cesar desperately wants to leave his job, but he cannot afford to due to chronically high unemployment. Instead, he works extra hours just to keep the one he has while simultaneously trying to start a new business. In other words, he's already working extra at the job he hates and working overtime to get a new venture off the ground.

My abuelos are struggling, too. My grandfather was the only one who worked, so both of them survive on his pension. Since the pension comes from the government, and the spending freeze is in place, they survive on very little income. This bleak fact is only made worse when realizing that as they get older, they will need more medical care (not to say they aren't already getting a lot of medical attention for current ills now).

But when my family needs most help from the state now, their autonomous region--Catalonia--doesn't even want to be part of Spain anymore. Currently, 51 percent of Catalonians want to separate from Spain and be its own sovereign state. This is the highest number it has ever been, even with historically high tension between Catalonia and Madrid since the Franco dictatorship. Also, and perhaps unsurprisingly, the rise of Catalonian feelings of exceptionalism and independence have coincided with the great play of that region symbol, FC Barcelona. Of course, Catalonia isn't alone in wanting to separate from Spain--the Basque Country and Galicia come to mind--but it is currently the most vociferous.

Spain is in for long time of pain. It is unavoidable. But during this crisis, Madrid has imposed much-higher VAT taxes, pension cuts, medical cuts, all while denying autonomous regions the right to control their own areas. In other words, Rajoy is trying to wrest control from the seventeen regions during a time of strife. This will only cause more tension and uprisings in Spain, and perhaps lead to the reemergence of regional, separatist terrorist groups like ETA (Basque Country) and Terra Lliure (Catalonia). Especially with many youth unemployed--52.9 percent--they have time to think and need something to do. This is normally one of the fatal recipes that leads to a terrorist group formation.

I hope Spain turns around, for the fate of itself, my family, and Europe. But, based on current trends, the pain in Spain will continue.

Is "America the Undertaxed"?

Andrea Louise Campbell, a professor at MIT, has written an amazing article on the tax policy and history of the United States compared to other industrialized countries. She argues three things: "the United States has very low taxes, little redistribution of income, and an extraordinarily complex tax code."

Source: http://www.foreignaffairs.com/articles/137838/andrea-louise-campbell/america-the-undertaxed

To her first point, she claims that "U.S. tax revenue is not only low but also consistently low, having equaled roughly the same share of the economy for 60 years." She also points out that everyone--from the top one percent to the middle class to the bottom bracket--have the lowest effective rates in history. And, interestingly, "Americans pay more in payroll taxes than in federal income taxes."

In terms of income distribution, it is skewed toward the wealthy. "The share of total income going to the top one percent of earners," she claims, "increased from nine percent in 1970 to 23.5 percent in 2007." Further, this wealth share of the top one percent was the highest since 1928. It is also worth mentioning that while the top one percent in this country gained twenty percent of all income received in 2007, that same bracket holds thirty percent of the wealth. Meanwhile, "the bottom and middle have faltered," Campbell argues. "Congressional Budget Office data show that between 1979 and 2007, before-tax incomes increased by 240 percent for the top one percent but by just 20 percent for the middle fifth of earners and by ten percent for the bottom fifth." Perhaps most striking is that "almost one-third of Americans have low-incomes, meaning ones below 200 percent of the poverty line." This means the United States has the highest poverty rate among rich nations.

From: http://billmoyers.com/content/chapter-one-of-winner-take-all-politics/

From: http://billmoyers.com/content/chapter-one-of-winner-take-all-politics/

Finally, the tax code. Yikes. It's out of control. As Campbell alarmingly reminds us, "the Internal Revenue Code is almost 12 times as long as the New Testament." There is no question that this needs to be simplified. However, according to Fox News, tax-preparing firms have been lobbying Congress not to simplify the tax code so that people keep coming to them for help.

So how do we fix these problems? As I've said before, Simpson-Bowles is a good place to start. However, this plan didn't get through Congress (both Obama and Congressional Republicans are to blame). Since I am no tax expert, I'm not really sure how to explain many of these wonky things better. But here's what I do know: we need to debunk the notion that higher taxes mean less growth. Sure, very high rates taxes can bring the economy down; but we don't have very high tax rates. As Campbell has pointed out, they are historically low. According to two prominent economists mentioned in Campbell's article, there is "little correlation across the OECD countries between taxes as a percentage of the economy and the size of the economy itself, as measured by per capita GDP. Nor, according to their research, is there a high connection between taxes as a percentage of GDP and the annual rate of economic growth."

How you accept the data in Campbell's article and my (admittedly) lazy summary of it is up to you, but these are the facts. How we move forward says more about how we want to structure our society than how we want to structure our tax code.