The Community of Madrid and tax dumping

It was as far back as 2007 when the then Minister of Economy, Antoni Castells, put forward the need to harmonize throughout the State some of the taxes ceded to the autonomous communities, especially inheritance tax, so that there would not be a race to the bottom among all the territories. Castells was heavily criticized at the time because he incurred in an apparent contradiction: a federalist in favor of maximum fiscal sovereignty for Catalonia was demanding that the State set a limit to that sovereignty. However, the Minister pointed out that what made no sense was that a tax ceded so that the autonomous communities could better finance themselves would end up being turned into a weapon, by leaving it practically at zero, but steal tax bases, that is, taxpayers, to other territories. This is what is known as tax dumping, which is practiced on a European scale by countries such as Ireland and Luxembourg, but is particularly practiced within Spain by the Community of Madrid. This phenomenon (and nothing has ever been known about it), and now the PSC is once again championing it, as demonstrated the interview in Salvador Illa published in the ARA this Sunday, which provoked an angry reaction from Isabel Díaz Ayuso and the entire conservative press in general. Castells' reasoning was as follows: the race to the bottom to eliminate inheritance tax does not have a positive effect for everyone, but rather benefits some territories at the expense of others, and ultimately results in lower tax revenue. There is, therefore, not a virtuous circle but a vicious one.

Because the negative effect on other territories has even been documented. A 2021 report by academics Clara Martínez, David Agrawal, and Dirk Foremny concluded that, at the very least, 6,000 fortunes moved to Madrid between 2011 and 2015 for this reason.. In other words, this means that the rest of the autonomous communities had lost what these taxpayers declared each year in personal income tax and other taxes. As a consequence, a taxpayer in Valencia, for example, found himself with worse public services because his government had lost hundreds of millions that could have gone to healthcare or education. Furthermore, the regional treasuries are now investigating whether these transfers are real or fictitious in an attempt to recover some of the lost money.

The very existence of this tax can be debated, of course, but as long as it exists, the autonomous communities should use it responsibly and in a way that is not detrimental to their residents. In any case, what cannot be done is to renounce the ability to collect taxes and then, hypocritically, ask the State for resources to balance the accounts. Neither Europe nor Spain can allow the existence of internal tax havens that distort economic reality, weaken public coffers, and especially benefit the wealthiest.