José María Vallejo: “BBVA does well in all the tax transparency rankings”

He walks through the door decisively.  He smiles as he apologizes for arriving a few minutes late.  He is coming from another meeting that just ended, one of the many meetings he attends in his role as the director of BBVA’s Tax Department which force him to rush all day long.

From his accent you would never guess that José María Vallejo is from Cadiz, known as the Little Silver Cup (“la Tacita de Plata”).  “Yes, I am from Cadiz.  From the city of Cadiz itself - a category of its own in Cadiz,” he confesses smiling.  “From Puertatierra inland.”  Although his appearance and attire would make you picture him in London, we are very lucky to have him here in Spain.

He spent his childhood in several different cities because his father worked as a government official and had to move frequently.  “I got my university degree in Seville in Economics.”  After graduation he became a tax inspector in Catalonia, working there for more than a year.  Since then he has always worked in Madrid, except for a five year period when he had to adjust to the climate in Brussels.

Born in 1969, he likes the beach in Cadiz – a lot – skiing, and summer vacation, “especially summer vacation.”  He also likes traveling and biking.  As those have worked by his side know well, he is number one on tax issues, although he disagrees jokingly: “I’m not number one in anything.  Not here and not at home.”  He does make sure to add a point he considers important:  “More important than what you do is how you do it.  In my career I have been lucky that I have been able to add an approach that has satisfied me professionally in every position I have held.”

We joke about his hypothetical retirement in the future.  “I would retire tomorrow.  I can retire whenever you want,” he says laughing.  “Although my son is three years old, so do the math.  Until he moves out…” he adds smiling.  “I like to work.  I will work my whole life,” he indicates, now serious.

He uses gestures to explain how satisfied he has been working for BBVA since 2011: “I love how BBVA as a Group has become a large multinational, a global leader, so quickly and soundly.  Just look at how it has taken the lead in digital banking, the next revolution,” he comments.

Q: BBVA has reason to celebrate for being one of the top Ibex 35 companies for tax transparency, according to the 2015 Tax Transparency ranking. What is the reason for this success and why do so few Ibex companies appear in the ranking?

A: This result, this ranking is a recognition of BBVA’s effort, not only this year or the year before - when we were in the top 2 of the same ranking – but of the effort that has been underway for transparency issues for years now. Concern for transparency in general, and for tax issues more specifically, is starting to become more common among Ibex companies. Some of us have been investing in this for a long time and others have started to consider the issue more recently. That’s why some are achieving targets more quickly than others.  It also shows that it is an issue that must be taken into account in one way or another. There are many different methodologies to determine how to measure transparency.  A lot of rankings are starting to be published by NGOs, foundations, public, private, national and international organizations and the results vary depending on the variables used or how they are weighted.  The reality is that there are companies like BBVA that do well in all the rankings and that is a sign that our work is moving in the right direction. This probably also explains why certain companies do not yet meet certain standards with widespread acceptance.

Q: Why has BBVA chosen the total tax contribution (TTC) methodology?  Is this becoming a trend in Europe?  

A: To answer this question, we have to go back to when this exercise started. In 2011, when BBVA began thinking that it needed to measure and raise awareness among society about the effort that was being made with the bank’s contribution in terms of taxes, there really weren’t many methodologies available. In fact, the bank was working on its own methodology with its own KPI indicators, but we came to the conclusion that it was always better to use a third party’s methodology to ensure objectivity.  We looked around to see what was available and found a methodology developed by a consulting firm, the total tax contribution, which had been used fairly extensively for several years in certain sectors.  Since then, over the last four or five years, there has been a greater global effort in tax transparency. Given the lack of a common public methodology approved by the OECD or European Commission, we still believe that it is a perfectly valid methodology.  It allows us to track the results over time and compare one year to another. Therefore we still consider it the best option. If we had to make a request or reflect on how it could improve, I would support a methodology promoted by the OECD, for example, which has been working extensively on this issue recently, or even a methodology that would be completely monitored by the European Union. This would allow us to know how much we are really paying in comparison to others.

Q: Does the need to show that BBVA is transparent come from the bank wanting to make this effort as another step forward or does it come from society questioning it?  Why is BBVA ahead of so many institutions?

A: That’s a million dollar question.  Around 2010-2011, an international movement, which gained strong foothold immediately, started to emerge demanding tax transparency.  Why? Basically because global tax contributions fell as a result of the crisis and governments needed funds to finance policies, deficit and levels of debt that we are all aware of.  At the time, society - mostly represented by a series of stakeholders, social movements, and NGOs – began wondering, “Hey, who took my money?  Where is the government money that finances our policies or the policies we need? At that time, in 2011, inside our bank, we weren’t really aware of the tax contributions.  In the tax advisory team we saw this clearly and decided to start to work on it.  What advantage did we have as a corporation?  Well, when we started to look, we found that transparency, caution and integrity are in our corporate principles. Suddenly, everything that involved transparency fit perfectly with our way of working and communicating.

Then came international pressure, global pressure over who pays taxes, why and how, who doesn’t pay what they should, with banks at the heart of the crisis as the ones who caused the crisis – not Spanish banks, not BBVA, but banks in general – and transparency in the Group’s corporate genetic code created the perfect scenario to say, “We’re going to take a step forward.”  In fact, our first tax contribution data, globally and by country, was voluntarily published in 2011. And in 2015, European banks were required to submit this information under the CRD IV.  What we started to do voluntarily and which was a little pioneering, in 2015 became a requirement for European banks. The OECD has established a country by country report system for all sectors and all countries which will start next year.

Q: There are a series of projects related to tax regulation trends in Europe. One of these projects is BEPS. What is it?  What is the current trend in Europe?  

A: The BEPS project is an acronym for Base Erosion and Profit Shifting.  It is an exercise that supposedly intends to prevent the erosion of tax bases and profit shifting from one jurisdiction to another for artificial, non-economic reasons.  The BEPS exercise emerged in the OECD as a mandate from G20 world leaders in order to start analyzing what is occurring with global taxes.  In other words, why are tax payments and global tax collections falling, why large companies’ aggressive tax policies are a problem, and what can be done to avoid them, to fight against them.  Then, the OECD started this exercise, the BEPS exercise, which sought to establish principles that can be summarized as the multinationals having to pay taxes in the countries or jurisdictions where they operate for the value they generate.  If I have a production line that involves a multinational organization, I have to pay taxes in every country for the portion of value that is created there. I can’t have an artificial organization, an aggressive tax policy that aims to reduce the tax base I have to pay or take it to countries with lower taxes.

Q: In other words, if we assemble a car in Spain, France, Italy and Croatia, and we put the body of the car together here, add the wheels in France, the doors in Italy and the motor in Croatia, we would have to pay taxes for each part of the car in each country?

A: Not for every part of the car.  We would have to pay the value that it adds to the car. The added value is created from different contributions in each country. An operational and reasonable formula, which allows each government’s tax office to collect taxes on the value created in their country, is needed. In BBVA, if I have an operation with an international client located in several countries and I am making a wholesale banking product (Corporate & Investment Banking or CIB), the process can be divided into several parts. For example, if I am doing the lending from London because I have the best treasury desk there, I can manage the risks in Spain, and the final part of the origination and sale can take place at the New York desk for Latin America. In a situation like this, you have to determine what share each participating team has in the whole project.  You have to trace the project, trace the value created in each jurisdiction and establish mechanisms to pay.  This doesn’t mean that as a company, I can’t choose the organization I want.  In fact, I can decide to have the treasury desks in London, the Latin America originators in New York… which is how it is, or I can have a risk center in Houston or Madrid because the risk algorithm is there. If I have each part of the production geographically distributed across different jurisdictions and they all contribute to production, for BEPS, you can’t maintain that “if the customer is Chilean you can declare that the entire operation is in Chile.”  Because that’s not true.  Because, really, you are distributing the cost.

So, what is the problem?  Well, in the end, tax offices are national.  The big problem is that as a last resort, taxes are an issue for which state sovereignty is aggressively claimed.  What does BEPS defend then?  Basically that “a bank cannot have its risk, quantitative  and origination team in Spain (so expenses for its tax base), if there is not a corresponding income.” The income, which can either be the product sold to the Chilean or part of a commission, needs to come here.  Chile, on the other hand, is going to maintain that “it’s wonderful if you have income here and don’t declare expenses and costs because the tax base increases.”  But it’s possible that the bank is going to a country with a lower tax rate.  It’s transferring its profit to that country. It is a very technically complex issue because it requires knowledge, functional analysis of your business to really know what each component is contributing.  It is not just that - as could occur not only in banks but in any business until recently - in the end, in some way, an institution decides based on internal accounting analysis how to distribute costs and income. Sometimes income is even distributed several times (how to pay the team that did the origination in the U.S. and was sold in Latin America, for example).  Each institution can do what it considers best, but must not be deceitful in how the tax base is calculated – what interests tax offices, or at least the bulk of it.  So what is BEPS?  BEPS is a global initiative that says, “Listen, countries, states, organize yourselves in a way so that the value chain is distributed, recognized and paid for in each jurisdiction.”  It is an OECD initiative that is sort of considered soft law.  It is not binding. It is a theoretical and practical exercise.  So what has happened now?  The EU has taken over and is regulating the issue.

It released a package that intends to establish a binding European BEPS for member countries in a way that establishes a community rule or directive that will subsequently transfer to the states and which guarantees that the value chain allocation takes place in a reasonable manner.  The purpose is to avoid tax loss in the countries that influence or really participate in the production line.

Q: Will the EU’s new binding adoption of BEPS change the way BBVA is working in this regard?

A: The binding adoption of this principle could affect all businesses that haven’t been trying to adopt this principle until now.  This principle was already an inspiration for our tax strategy.  Our tax strategy was approved in June 2015 and consider as an international standard to follow, the BEPS standard. Our tax strategy established that we are committed to organizing our taxes so that we pay taxes in each jurisdiction in accordance with the economic substance of our business.

Q: So there is no tax harmonization in Europe?

A: In terms of corporate taxes, no.  And for direct taxation issues, no.

Q: You have mentioned that it is very much a national issue, so to speak.

A: Tax harmonization in Europe has basically been an indirect taxation so far.  Direct taxation is the stronghold of national taxation, of the national economic policy.  Countries defend their sovereignty with tooth and nail.  In fact, the biggest accession problems for the European community are related to tax issues. What Ireland, at the time, and now the U.K. are contemplating  is “I am a sovereign country in terms of taxes and I want to continue that way because I know that it is an essential instrument of economic policy.”  So tax harmonization is not making progress.  The EU also requires direct taxation votes to be unanimous.  Unanimous among 28 countries. Where are they making progress?  In coordination over information sharing, for example. This is an area where great effort has been made.  This is the case of BEPS.  It is a coordination exercise.  Each country can establish its own tax strategy provided that they abide by certain principles which, in one way or another, fit well with this philosophy.  On the other hand, BEPS has risks for companies.  If the states do not cooperate it could translate into double taxation.  That’s why it’s a global exercise.  If each country tries to protect its tax base, there will be overlaps.  For example, if Mexico decides that it is going to establish regulations to protect its tax base and Spain does the same thing, it is very likely that their measures will overlap and affect the same tax event.

Q: This overlap would always be in counter to the company’s interest, correct?

 A: Right. In the end, global, and transnational companies operate in different jurisdictions.  So if the contact points are not aligned, the company will be the one at loss.  It may pay more taxes that it should or could make some businesses inefficient.  It could reach a point where the company decides not to work in a certain jurisdiction because it isn’t profitable.  For banks, many products’ profit margins are very narrow and withholding 10-15% of profit puts them out of the game.

Q: With the measures you mentioned before, authorities are also trying to prevent companies from creating artificial headquarters for payments, which could be linked to tax havens. How does BBVA manage this issue? Is the bank tied in any way to any tax haven?

A: Concerns over tax havens are mounting among the general public, which views them as black boxes where economic activity takes refuge to avoid paying taxes. It is necessary to clarify that, currently, a tax haven is defined as a territory that does not engage in an effective exchange of tax information. To this regard, the Spanish government has adopted an active approach, signing Double Taxation Agreements and Information Exchange Agreements thanks to which the list of tax havens has been substantially reduced.

However, nothing prevents companies from operating in tax havens for economic reasons, to pursue an actual business opportunity. Let’s consider an example of another industry that’s really easy to understand. If a hotel company needs to open hotels in locations close to ocean beaches, with nice weather, it will most likely look to invest in the Caribbean islands, some of which are ens. The economic activity is effectively taking place, and an actual service, a hospitality or leisure service, is being offered.

For our part, BBVA is committed to limiting its operations in tax havens to the maximum extent possible. We have never operated in tax havens seeking a tax-related benefit. BBVA has always operated in accordance with the economic substance, the reality of the business carried out there. And what’s this reality as of today? BBVA holds, as it is clearly stated in the Group’s public financial information, a series of entities in the Caiman Islands, a territory classified as a tax haven by Spanish authorities. These entities were originally established for legal and trading purposes. However, this territory is not considered to be a tax haven by the US, and any profits earned there are subject to taxation through our New York branch. So, BBVA does not engage in any type of opaque operation in any tax havens. And, of course, the bank's vocation and commitment is to never do so.

Q: Many people talk about companies paying taxes a very low rates, between 5% and 7%. Is there any truth in this? Within which range is BBVA?

A: This number is the result of a significant methodological error. It has been taken from the Tax Agency’s Collection Report, which uses many ratios uses, including one that compares the net tax amount paid in Spain and the accounting result of the Financial Group. In other words, it does not take into account what the Group is paying in other countries on the profits generated within each one of them. Several lines below, the report includes another indicator, another ratio that compares homogeneous magnitudes: it compares the amount paid in Spain with the profits generated in Spain, and, overall, over the past four years, the ratio has ranged between 16% and 20% for Spanish groups.

In second place, in the case of BBVA, over the past two years, 2014 and 2015 the rate has ranged between 25 and 27% of the corporate tax. Also, if instead of using accounting figures, we use a ratio that is the amount of total taxes paid effectively on the corporate tax of the Group versus the Attributable Profit of the Financial Group as a whole, for years 2014 and 2015 we would be around 25-35%. The highest we’ve paid is 70%. Why? Very simple. Taxes are paid where profits are earned. Where losses are made, no taxes are returned. Instead, a tax credit is recognized that will be used the next year, or in any subsequent year. When you add all up, profits in Mexico offset losses in Spain, but the taxes paid on the profits on Mexico are not offset by anything. That is the reason why there have been years when we’ve made a profit that's not too different to this year’s, but, due to its structure, we’ve recorded cash outflows due to corporate taxes of up to 70% of the Group’s results.

Q: How can you explain or express the differences in corporate tax rates, even within the EU? How does that affect us and what do you think about it?

A: This question is intimately linked to what I said before about the national sovereignty, the defense of each country’s decision-making capacity. I believe that, in general, in the EU there are countries with tremendously different economic realities. I am talking about countries as different as Germany, France, Italy, Spain and the UK, the five biggest economies in Europe, with large populations and high levels of social services that, therefore, with their particularities, need to apply high tax rates, . They need to secure an inflow of public revenues. Among these countries, each tax culture is biased towards a specific ideology, but the models, the tax systems, are quite similar. On the other hand, we have smaller countries, like Luxemburg or Ireland, with small populations, which have adopted models with lower tax rates or higher nominal rates that, through particular agreements with companies, have been reduced. In this reality, there is a part which is considered legitimate – which arises from each country's own autonomy – and another part that is considered illegitimate - which is the result of proactive actions or policies aimed at attracting business and taxable bases. In these matters, the EU has been working since 1990 on a series of exercises to try to eliminate detrimental tax schemes within the EU. Hundreds of tax regions have been eliminated which, in some way or another, were trying to attract economic activity and fiscal benefits to some countries that solely sought to benefit from a tax advantage. The recent Luxleaks issue has added a new spin to this issue. The level of concern and scrutiny over what countries establish in tax policy matters is growing and growing. In other words, countries are sovereign and can set the tax rates and systems they consider more adequate. What they cannot do is base their tax collections on attracting or draining other country’s tax revenues. I believe that the case of Luxemburg is quite paradigmatic. One of the things the Luxleaks have shown us is that Luxemburg, as a nation, was encouraging large business groups to localize their operations in the country, by offering them truly notable tax advantages.  In fact, for this very same reason, the EU has launched a line of work that is looking into all these nationwide incentive schemes, and is aimed at dismantling them.

Q: Going back to BBVA, the Group’s TTC in 2015 was lower than in 2014 and 2013. How would you explain this? 

A: Well, tax contributions in 2014 and 2015 were quite similar and only differed by €20 million. There is, however, a drop from 2013, which is fundamentally explained by the disappearance of a tax in Mexico that generated very high tax collections. In any case, I would highlight that, despite the different factors that are taken into consideration when determining this total amount, such as the change of perimeter in BBVA Group, the foreign currency effect, or the changes in the taxation systems in each country, the amount paid remains stable, and this indicator shows that BBVA is a very solid taxpayer.

Q: What’s really striking is that, in 2015, BBVA made its highest tax contribution in Argentina.

A: This is really easy to explain. There are total tax contribution is made up by, essentially, two headings: The bank’s own taxes, the taxes regarding which the bank is the taxable entity, and third party taxes, that the bank collects and manages, but regarding which the taxable entity is not the bank. So, what happens? Argentina imposes a very heavy third tax on bank deposits and withdrawals. It also has set a reasonable corporate tax and a high VAT payment. This is why it is important to follow a third party methodology, one that’s internationally accepted. An institution’s total tax contribution is measured by the taxes it pays and what it contributes to collect as economic agent.

Q: Let’s move on to what may become a key topic during the first half of the year: Brexit. Implications or possible implications if the UK votes yes to leaving the EU.

A: From a taxation point of view, it is hard to say. I believe that if a country such as the United Kingdom – which takes tax sovereignty matter so seriously – is wondering about whether it should leave or stay in the EU and finally decides to stay, this will have, logically, consequences. It would strengthen this sovereignty, or the progress towards coordination versus harmonization in Europe.

Q: The Spanish tax barometer talks that about the very negative perception among the general public regarding the tax contribution of companies. Notwithstanding any of the measures that Europe or BBVA may be applying, what can be done to fight this perception?

A: This perception is clearly related to the myth we talked about earlier, that big corporations only pay a 5% tax rate. The exercise to measure the total tax contribution and the defense of transparency prove that this myth is false. There are reports by institutes from universities in the US and international consulting firms that prove that European and US multinationals are subject to, in general, tax rates that range between 20% and 30%. And European companies pay more taxes than US companies.

There are reports by institutes from universities in the US and international consulting firms that prove that European and US multinationals are subject to, in general, tax rates that range between 20% and 30%

Q: George Osborne, the Chancellor of the Exchequer in the United Kingdom recently introduced a measure whereby people working with companies of the so-called sharing economy, such as Airbnb, will not have to pay any taxes on the first £8,000 pounds they earn, while in online traders, the first £1,000 will be tax-free. I don’t know if the legislation is groundbreaking, or if what’s is truly groundbreaking are the businesses. Can these measures be replicated in other EU countries?

A: Applying tax breaks on certain amounts, bare minimums, in any type of income or business, or establishing regimes to nurture emerging business, is quite common. These measures you just talked about are nothing but a series of tax breaks offered on the first amounts of income earned through activities that are - in some way or another – new, and which the country wants to support because it thinks that they are part of the new economy. Therefore, this instrument as such is very well known. Also, the main purpose of the tax policy is to secure the State’s resources, but it is also used as economic policy to achieve an end. It is possible to encourage or discourage activities through a tax scheme. In Denmark, for example, new car registrations are subject to a 100% tax, because instead of cars, authorities have decided to encourage the use of bicycles. If a country decides that the sharing economy is a good alternative for certain social sectors, or that it is a good activity to make the economy more competitive and decides to offer tax breaks up to a specific amount, that’s something that can be considered part of the standard practices in terms of tax policies in general. Replicating these measures in another country, to the extent in which this country wants to or shares the idea of promoting this type of businesses, is feasible. But many times, fiscal policies are also a nationwide issue. What is true, is that, while tax policies are an element of national solidarity, there is a spontaneous convergence among tax systems. And, ultimately, countries end up exporting/importing this type of measures.

Q: Especially if they are successful, right?

A: Of course.

Q: But, could these measures also be seen as an invitation to encourage certain activities of the submerged economy to surface?

A: That could also be. Especially in the stage right before the digital world, where there wasn’t as much information as there is now, taxes also served a censal purpose. In other words, they were aimed at detecting hidden activities and wealth. Maybe, they weren’t intended so much to increase tax revenues, but to gather information instead.

Q: This year, BBVA approved a fiscal strategy for the Group, which you said before was a bit in line with BEPS, if I am not mistaken. Could you please give a bit more color about what it is about, what is its purpose?

A: The Group’s tax strategy is a regulatory obligation that the Spanish Corporation Law established for year 2015. This law dictates, to some extent, the mercantile life of companies. The Board is the body responsible for its approval. It is a measure that seeks to engage top governance bodies, not so much in the daily grind of tax related activities, but defining the strategic lines. The approval of this strategy responds to this obligation. Once the bank analyzes or formalizes this strategy, it logically studies which are the principles that should govern it. We have chosen two sources to develop our internal standards, our corporate standards. The corporate principles: Transparency, prudence and integrity; and the best international transparency standards: BEPS.  Therefore, our fiscal strategy is a broad decalogue that regulates what our action is going to be based in, always keeping in mind the need to act in a transparent, prudent and upright manner; and our approach to taxation based on these principles that we discussed before, so that we clearly have a commitment to pay our taxes in the countries where we generate profits or economic activity. We also have the vocation to maintain a cooperative relationship with tax agencies in the countries in which we do business. There is a specific reference to being transparent as regards our tax contribution in the countries in which we operate. So, to wrap things up, we have these two principles: Corporate principles and international standards.

Q: Why have companies, up until now, shown so little interest in the field of tax transparency?

A: I believe that, in general, the field of taxation has been seen as somewhat enigmatic. It is a technical and complex field. It seemed as if conflicts could arise between states because they all want to collect as much as possible. It somehow felt like there was no gain in actively managing the companies’ tax position. This notion has been changing. At BBVA this change has been driven by conviction. Indeed, when the transparency is part of the Group’s DNA, it is evidently an issue that it is not going to shy away from. And other companies have also started changing their approach, maybe because they have felt, in a way, obliged to. I believe that, today, one of the changes that both the crisis and the regulatory environment have originated, is that transparency is here to stay. Some people also think that transparency is good because when a company actually operates following a set of principles, it can demonstrate that the best thing it can do is explain what it does.  And, why not move before the administration does? I don’t think this has been a politically correct nor aesthetic initiative, because as we have seen, very soon, in a matter of two or three years, the international regulatory framework started moving along this path. For us, it has been especially easy process, because our internal corporate framework supported it.

Q: Has it been very costly to impose this transparency order?

A: No. It cost us to generate the information that did not exist or in a way that did not exist, and build an information reporting channel that currently works wonderfully. In fact, the guarantee is that we are applying a methodology developed by a third party, a consulting firm, and that the figures that appear in those tables are verified by the auditor.

Q: A question that the average person on the street may ask. In the late 1990s and the early 2000s, we got tired of hearing how it was possible to increase tax revenues by lowering taxes. One gets the feeling that, in recent times, reality has challenged this notion. Where’s the balance that the average citizen many times does not perceive regarding the point as of which one could start talking about predatory tax practices? Where’s the balance, the balance that generates so much frustration in times of hardship?

A: This is a very complex question because it entails or requires taking into account many considerations. In first place, it is true that there are data that support that in stable economic environments, lower taxes have generated a more intense economic activity and, therefore, an expansion of the taxable bases. This is a fact. There is one thing that we many times forget: In the case of the average citizen, direct contributions come from income taxes. In the case of companies, from taxes levied on their income, their profits. If you have no profits you cannot pay any taxes. For this reason, in a significantly complex economic environment, such as Spain’s in recent years, saying that large corporations pay no taxes makes no sense. In 2007, corporate tax collections in Spain stood at €44 billion. Last year they reached €16 billion. The explanation is in the drop in the economic activity and in the size of the balances sheets: 67%. How much have tax collections dropped? 63%. It seems logical, doesn’t it? So, we now have two options: Higher taxes to secure higher revenues or lower taxes to boost economic activity and generate less taxes. These are two opposite models, which probably work, and which have a different ideological base. In second place, we need to take into account the economic environment. Logically, the global economic crisis has caused tax revenues to drop. And this leads to a third question: During periods of extreme crisis, who makes the effort? There some tax options that offer results in a reasonably quick period of time, such as increasing withholdings. Withholdings are the amounts that companies deduct from their employee’s paycheck. This generates a revenue, but, does it undermine consumption rates in the long run? Yes, because it reduces the amount of available income. Lower VAT collections? Indeed. Does it remove incentives to work? In the mid/long term that’s a bit more complicated to measure. But, without a doubt, the short term effect is that tax revenues increase. So, what has happened and what does usually happen during this stress processes? Ultimately, this is a stress test, or a stress situation, as politicians usually resort to measures that boost tax income quickly: Income tax withholdings and VAT increases. And, ultimately, who do these measures end up affecting? In general, the wage earners that consume, generally the middle classes. As regards the famous question of paying taxes in accordance with the economic status – people that earn more, that are more wealthy – 40 years ago when incomes and wealth could not be moved around freely, it was possible to increase the tax burden on these incomes and wealth. Now, there is a risk of displacement. A wage earner that has a job within a certain country, will find it harder to move. But the people that have financial investments and a series of vehicles they can move easily may decide to relocate and that would be a perfectly legitimate option. It is true that the effort is made by those who can be quickly and effectively be subject to a greater effort, which are not always the wealthiest people. And all this, combined with other factors that we can all imagine, is what leads people to perceive that they are making a bigger effort than they should. The general public wants to see public administrations spending more efficiently, not seeing the money spent on other issues, which is what, in the end, generates, this feeling, in my opinion. This contributes to the perception that one pays too many taxes. In the Nordic countries studies show that at very high nominal and effective tax rates, citizens don’t perceive tax schemes as predatory, because, in exchange, they get quite notable public services, including education, healthcare, and social welfare. If taxpayers make an effort in this sense but they get something in return, they don’t feel like they are paying too much.