Recession-hit Spain goes back to black economy
News Article Date: Tuesday 27th of October 2009
Unemployment benefits in Spain are very generous and family support networks are stronger. But the Spanish may also be falling back on a less attractive tradition – dodging taxes. Anecdotes abound of people working in side jobs while collecting unemployment benefits. A study by the University of Linz estimates illicit activity will account for 19.5pc of Spain's GDP by 2010.
There are signs that the so-called black economy is growing. Corporate tax receipts in June to August were 37pc lower than in the same period last year – a much bigger drop than might be expected from the slowdown in economic activity. Or consider the surprisingly small number of people who applied for extended unemployment benefits. One reason may be the requirement to take training courses to qualify. That's difficult if you're already working at another job.
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|The global economy needs the US glutton to crawl back to the tableThe rise of the black economy is bad news for a government in need of tax revenues. The tax inspectors' association claims that up to £100bn (£91bn) could be hauled in over the next four years. Still, black-economy activity is better than none.
A windfall tax on bankers would be lesser of two evils
By Hugo Dixon
The chorus calling for a special bankers' tax is getting louder. In the UK, politicians on both sides of the political divide are talking about the possibility. Even Boris Johnson, the pro-banker Mayor of London, has written that the time to avert a windfall tax is running out fast. Members of the Obama administration, meanwhile, have also denounced mega-bonuses.
Windfall taxes are normally a bad idea. They smack of retrospective legislation. Banks have taken risks under one set of rules. If they are subjected to a super-tax now, one could argue that this would be unfair – and would undermine one of the key precepts of a capitalist economy. This is true. But capitalism does not exist in a social vacuum. One can argue that if banks continue to be insensitive to the wider community – by paying mega-bonuses at a time of rising unemployment in the midst of a recession partly of their making – they too are undermining capitalism's social foundations. This is bad too.
A windfall tax would be an evil, but it could well turn out to be the lesser of two evils. In justifying it, politicians could very legitimately argue that the banking industry is only now enjoying massive profits because it has been bailed out by the authorities. The bailouts have come in many shapes and sizes. Some institutions have had direct injections of capital. But the whole industry has been able to get access to cheap liquidity and government-guaranteed, medium-term funding. Ultra-low policy interest rates have also made it easier for banks to mint billions in trading profits.
With the recession having shot government finances to bits, politicians will ask why schools and hospitals should suffer when bankers are walking away with their mega-bonuses.
There are two main candidates for a windfall tax, each with multiple variations. One is a tax on profits. In its simplest form, this would be an extremely bad idea. It would do very little to curb excessive pay. Indeed, given that higher bonuses would reduce profits and so tax, there would actually be a perverse incentive to increase compensation. Higher taxes could also make it harder for banks to rebuild their capital bases.
While it might be possible to modify a profit tax to deal with these problems, the simpler alternative might be a bonus tax. One option would be to apply a super-tax on total compensation – not just bonuses – above a certain minimum level, say $250,000 (£153,000). Such a tax would encourage banks to retain profits rather than pay them out.
It is still to be hoped that a windfall tax can be averted. But to avoid this fate, the banks need to restrain mega-bonuses this year. They should also put much more money back into society through donations to charity. If they don't act rapidly, they will have only themselves to blame if society turns against them
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