The continuous reductions in the Personal Income Tax of the Community of Madrid represent a loss of tax collection that is not recovered either by attracting taxpayers from other autonomous communities, which would generate more income to the public coffers, or by the probable induced increase in supply. labor. It is one of the conclusions of the study Interregional migrations in Spain of certain taxpayer profiles in the period 2016-2019: the role of regional variations in taxation on income and wealth, published by the Institute of Fiscal Studies (IEF), analysis body dependent on the Ministry of Finance, and which analyzes the residential mobility of the 1% of the wealthiest taxpayers during the years prior to the pandemic.
The report indicates that the strategy deployed by the governments of the Community of Madrid in recent decades, reducing the regional income tax bracket, generates a revenue loss that is “notably higher than the possible gains in public income generated by migration.” of taxpayers from the rest of Spain.” The study analyzes in detail the distribution of the highest incomes across the country during the four years prior to the pandemic and this conclusion coincides with previous studies that pointed in the same direction, such as those by David R. Agrawal and Dirk Foremny.
The technical document therefore contradicts the statement that tax reductions are beneficial for the economy of a territory. Experts point out that it is more of a myth: “Whoever lowers taxes loses a lot of revenue.” The Tax Agency concluded that the reductions in the personal income tax of the different autonomies subtracted 1,677 million from income in 2023.
Another conclusion of the study is that, thanks, in part, to these tax reductions, Madrid acted as a centrifuge for a majority of entries by high taxpayers between 2016 and 2019. More than 6,000 high taxpayers moved from the autonomous community in that time. period, and more than 2,500 chose Madrid as their destination, which they received from all territories. The most significant transfers occurred from Andalusia, with more than 530 tax migrations, and Catalonia, with 366 high-income transfers to the capital. The second territory that received the most high incomes before the pandemic was Catalonia itself, although a great distance from Madrid, with 479 tax migrations, 8% of the total. 158 of them arrived from Madrid and the rest, essentially, from neighboring autonomous communities: 83 from the Balearic Islands, 77 from the Valencian Community and 40 from Aragon.
The vast majority of autonomies lost taxpayers considered VIP during 2016 and 2019, including Catalonia. Four, however, showed a positive migration balance: the Community of Madrid, Galicia, Cantabria and Extremadura.
The main researcher of the report is Fernando Rodrigo, professor in the Department of Applied Economics at the University of Zaragoza, who explains that “a confluence of economic and fiscal factors causes the confluence of high taxpayers to Madrid.” Among these factors, Rodrigo adds, is GDP growth, the location of large company headquarters and decision centers, foreign direct investment, the urbanization rate, specialization in productive sectors with high added value and also tax advantages. .
The report points out that “regional differences in regional taxation of taxes on income and also wealth (essentially wealth tax, subsidized in Madrid until the emergence of the new tax on large fortunes) turn out to be a significant factor” for high taxpayers decide to change their tax residence. For Rodrigo, on the other hand, taxes are “a second-order residential relocation factor.”
This reality faces another problem also reflected in the study published by the think tank of the Ministry of Finance. It refers to the inconveniences that the Tax Agency faces in verifying whether changes in tax residence are real or fictitious. That is, there could be taxpayers who have their tax domicile in Madrid but the core of the businesses could be in another territory. To combat this situation, the administrations of Catalonia and the Valencian Community have specific plans.
