The revenue ‘miracle’: tax revenue grows twice as much as GDP

  • The tax case increases at a rate higher than 13% while the economy does so at an average lower than 6%

  • Economists believe that the INE methodology underestimates the current growth in activity

There is a small steakhouse in the mountains of Madrid run by a self-employed businessman who, until very recently, did business serving roasts to his customers ‘on-site’. With the pandemic, he began to explore the home delivery business, vacuum packaging their roasts. This year he has been delivering Christmas menus for weeks and weeks at 70 euros for four people. If previously you could only serve the roasts that could fit in the oven that same day for Christmas Eve, now you are serving hundreds of them over the weeks.

The VAT of each of these purchases is paid to the Treasury, which sees an increase income derived from this type of sales. However, this new digital reality of business and a growing number of autonomous —Increased during the pandemic—, it seems to be not sufficiently covered in the manuals of National contability managed by the INE, according to some economists. The result: the collection grows, but it does so to a lesser extent the Gross Domestic Product (Start).

This could be one of the causes behind the ‘income miracle’ that amazes economists more and more as the year progresses: collection is growing more than double that of the economy, when the normal thing would be to observe a similar variation.

With data up to November, the revenue collection by the State Tax Agency records a growth in homogeneous terms of 13.2% compared to the same period of 2020 (an increase of 3.9% compared to the first eleven months of 2019). However, according to data from the National Statistics Institute (INE), the economy has grown an average of 5.6% in the first three quarters of the year.

“We do not have an exact explanation of the phenomenon & rdquor ;, recently admitted Óscar Árce, General Director of Economics and Statistics of the Bank of Spain. “It is one of the most mysterious issues that we are observing in the statistics, along with the evolution of employment & rdquor ;, which also grows at unusual rates in relation to GDP,” says the Director of Situation of Funcas, Raymond Torres.

There are causes that serve to explain why income is growing so much. Others, to explain why GDP grows less. These are some of the reasons for the decoupling between income and economic activity data:

Possible error in the estimation of GDP?

“We have an intuition, more than an intuition, that we are not measuring GDP well & rdquor ;, focuses the professor of Applied Economics Jorge Onrubia (Complutense University and researcher at FEDEA) who points out two factors: the digital transformation of the economy and the difficulty in collecting data linked to the pandemic. “Until now, the indicators that served to measure the activity were very well identified. They may not be as reliable now to measure the new economy & rdquor ;, reasons Onrubia, alluding to elements such as logistics activity of digital business.

GDP is calculated from 700 indicators and a methodology in accordance with the European statistical office Eurostat. “The economic effects of the covid-19 pandemic and the impact on activity and on the economic situation of the measures adopted to combat its effects are raising an unprecedented challenge for statistics and the analysis & rdquor ;, admitted in the INE. However, the Institute maintains that “GDP and base indicators cannot be compared directly & rdquor; and that “the relationships between macroeconomic variables and indicators may not be stable over time & rdquor ;.

Construction undervalued?

“There may also be a downward estimate in construction contribution to the economic growth data & rdquor ;, abounds Raymond Torres. The director of Situation of Funcas explains that the rules of the European statistical office Eurostat, to which the INE adjusts, they incorporate a method to evaluate the contribution of the construction of GDP in the moments after a crisis (such as that of 2020) that could be obsolete for a moment like the current one in which the data from cement consumption and employment they provide evidence of increased activity in the sector.

Elements such as these could be resulting in an undervaluation of GDP, especially striking compared to the evolution of income.

Second-hand homes and cars

According to the Director of General for Economics and Statistics of the Bank of Spain, Oscar Arce, there are two partial circumstances that could be contributing to the discrepancy between the collection and GDP data.

The sale of homes it is growing strongly. In the first ten months of the year, transactions have grown no less than 35.9%, according to data from the INE. However, eight out of ten homes sold are secondhand. These operations generate tax revenue but they do not count as higher economic growth, since these houses were already built and their transfer has not generated additional productive activity. In short: they are operations that contribute to an increase in income but not in GDP. And something similar could happen with second hand cars.

The rise of the self-employed

Another circumstance pointed out by Óscar Arce and Jorge Onrubia has to do with the role of the self-employed in economic activity. The digital economy and the pandemic have increased a type of self-employment linked to the internet (such as the asador de la sierra) that, however, could be being translated into the calculation of GDP under older schemes that attribute lower productivity to self-employment than to self-employment. salaried.

Sales in large companies

The sales, jobs and salaries in large companies and SMEs they constitute a fundamental basis for estimating GDP. In the second quarter, sales grew 26.1%, income from work increased 20.9% and average gross income advanced 4.1%. According to some sources consulted, this information, provided by the Tax Agency to the INE, could have reached with some delay in estimating GDP of the second quarter with the result of a possible undervaluation of the economic activity in that quarter, decoupled from the income data. The INE itself has recognized in some of its notes a delay in receiving certain data necessary to estimate the evolution of GDP.

The rise in prices of a large part of the products also contributes to a higher collection of indirect taxes such as VAT, says Raymond Torres. Also in the case of income tax —Onrubia abounds—, to the extent that inflation begins to be transferred to wages on which withholdings are applied on account of the tax. This last phenomenon, however, could be more intense in 2022. “If inflation is not corrected in the summer, we would have to start thinking about deflate the personal income tax rate& rdquor ;, advises the professor of Applied Economics, to avoid that the simple salary increase according to the CPI results in a jump in the scale of the tribute.

Emergence of the black economy

The pandemic has generalized the use of digital means of payment and this has been able to contribute to the emergence of a certain underground economy, with a greater practical effect on tax collection (via VAT, above all) than on the estimation of GDP, according to Raymond Torres.

Mirage in corporation tax

One of the most surprising data of the tax collection data up to October is the strong growth of the Corporation tax. In homogeneous terms, the collection for this tax has grown by 46.5% in the first eleven months of the year compared to the same period in 2020 (and 10.8% compared to 2019). The Tax Agency recognizes some extraordinary business operations behind this data (merger and sale of assets), but there could be something else. “It is possible that the strong growth in income from payments on account of this year’s results are deflated in the 2022 declaration by the negative basis compensation”, anticipa Jorge Onrubia.

Related news

Until November, the increase in personal income tax for the highest incomes, the tax increase on sugary drinks or insurance premiums, the ‘Tobin’ and ‘Google’ rates or the income for amounts that were deferred in 2020 have resulted in a hearing collection of about 2,150 million. However, the tax cuts adopted by the Government have been greater, especially to compensate for the rise in electricity bills, resulting in a reduction in income of 269 million until October. The regulatory changes would therefore not serve to explain the explosion in income so far this year.

Support measures for workers and companies

“We believe that the main reason for this behavior of income is in the protection measures of workers’ income and activity of companies & rdquor ;, they assure from the Treasury. From his point of view, measures such as ertes, the benefit for cessation of activity for the self-employed or the endorsements to companies “they have made it possible for income to have been better sustained in this crisis and to perform better than GDP & rdquor ;. Something similar happens with the purchasing power of retirement pensions: they do not mean more GDP growth but they do translate into higher tax collection.

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