Spain's left-leaning Government has made good on a promise to abolish the country's longstanding wealth tax

In a speech given in December 2007, the Spanish Prime Minister Jose Luis Rodriguez Zapatero personally promised, if elected in March 2008, to abolish the country's wealth tax in order to join the majority of European Union (EU) countries which have already gone ahead with its abolition. Impelled by this electoral promise, the new Spanish government, through its Council of Ministers, approved a package of 11 tax and economic measures which includes the abolition of the wealth tax on 18 April.

Immediately following the Spanish general elections, won by the Socialist Party, one of the first reforms which Zapatero promised to undertake was to eliminate the wealth tax, which concerns only 941,000 tax payers in Spain, of which only 35,000 have filed returns of more than E1.5m (£1.18m), 85% less than E1.5m (£1.18m), and 500,000 between E120,000 (£94,700) and E300,000 (£236,775).

This tax, originating in Spanish law 50/1977 of 14 November, 1977, is a direct, personal tax on the net wealth of natural persons filed on 31 December of each year and, according to the provision of the law, must have an 'extraordinary, exceptional, and transitional' nature. Twenty years later, the Spanish state continued to collect the tax, before passing this on to the Autonomous Communities (with the notable exception of the Basque Country and Navarre, which had already been in charge of their own collection). Nevertheless, following the adoption of the package of economic and tax measures by the Council of Ministers which provides for, among other measures, the retroactive abolition of the wealth tax, as of 1 January, 2008, collection of the tax will take place for the last time in Spain in 2008, when the 2007 tax returns are filed.

According to the new Spanish Government's first estimates, more than a million taxpayers may benefit from this measure, providing them with a savings of E1.8bn (£1.4bn).

Zapatero, who considered that this tax was no longer suited to 'the principles of modernisation and simplification' of the Spanish tax structure, thus expresses an opinion widely shared throughout the Old Continent, where the wealth tax is no longer profitable. Indeed, there is widespread agreement in Europe in favour of abolishing this tax, so much so that currently only France and Sweden still collect it. Luxembourg, Finland and Norway abolished it in 2006. However, whereas France and Sweden have planned progressive reductions until the abolition of the wealth tax, Spain has tackled the problem head on and voted for a package of 11 tax and economic measures in the Council of Ministers on 18 April, which are to be instigated at the very beginning of his term, for several obvious reasons. Firstly, structural, as Spain has a sufficient 'economic cushion' to offset the loss which this reform will generate (varying, according to forecasts, between E1.2bn (£947m) and E1.4bn (£1.2bn) per year). Spain actually has one of the most favourable economic margins in the 25-state EU, with more than E22bn (£17bn) of savings in 2007, thus ending a third consecutive financial year with a significant budgetary surplus, and also reducing public debt by more than 13 points according to the gross domestic product (GDP).

The second reason is purely economic and strategic, insofar as abolishing the wealth tax would create an "incentive to favour savings in Spanish families" by providing 35,000 taxpayers with a savings of E700m (£552m), thus boosting the Spanish economy and opposing an economic slowdown after the setbacks ensuing from the real estate crisis and stagnation of the world economy.

The third reason is political, as this results from an electoral promise pronounced by Zapatero on 4 December, 2007, at a conference organised by The Economist magazine. Thus, the president of the Government presumably took into consideration both the national and European consensus expressed in favour of abolishing the wealth tax. Thus, in the last elections of the Spanish Autonomous Communities, various candidates in the Rioja Province indicated reform projects in this direction. Furthermore, a major reform tax was expressly provided for in the law of accompanying measures to the Madrid community budgets for 2008, which first provides for a reduction of the dependent charge, then a progressive decrease, until its definitive abolition.

It would appear that there is also an ethical reason to abolish the wealth tax, which primarily affects the middle classes, and thus has a negative influence on Spanish taxpayers. In fact, rather than redistributing wealth more equally throughout Spanish society, this wealth tax merely increased financial pressure on the middle classes by taxing inheritances and donations.

Finally, there is no choice but to accept that one of the raisons d'etre of this tax has disappeared. It was originally created to avoid flight of capital through rigorous, scrupulous control of taxpayers' goods (if a person owns more goods than their income, it is likely they are concealing financial gains to pay lower income tax). However, the wealthiest classes of society had 'various instruments and easy tax evasion devices' to avoid payment, for example by setting up societes patrimoniales.

As the wealth tax's abolition has only just been publicly announced by Zapatero, and recently adopted in the Council of Ministers, it will be interesting to know how the new Spanish Government intends to compensate for its abolition. In fact, its collection in 2005 provided the Autonomous communities with a financial gain of E1.44bn (£1.14bn), or the equivalent of E1.55bn (£1.22bn) per taxpayer.

However, these figures represent only 0.4% of the state's revenue, according to the words of the Spanish Socialist Workers' Party General Secretary, Francisco Martinez-Aldama. It would therefore seem that the Spanish Government intended to compensate the Autonomous Communities for this loss of income. It remains to be seen how they plan to do so.

Juan Ignacio Alonso Dregi is managing partner and Adrien Coispel an associate at Salans in Barcelona.