Black Market or Bust: The Stark Choice Facing Many of Spain’s Self-Employed

By Don QuijonesRaging Bull-Shit.

Every day scores of self-employed workers in Spain fall off the economic radar. In February of this year, three self-employment associations — ATA, UPTA and Uatae — sounded the alarm, warning that the number of self-employed and freelance workers paying social security contributions had fallen below three million for the first time since March 2006.

More worrisome still, 2013 promises to be a far worse year than 2012, given that the first two months of this year alone saw half as many self-employed drop off the social security register as in the whole of 2012.

Not that the government seems to care. Indeed, in the cruelest of ironies, the worst culprit when it comes to late payment of invoices — one of the main forces pushing the self-employed and small and medium-size enterprises (SMEs) over the brink of the financial abyss  – is the country’s local and regional government institutions. According to recent figures, the regional governments’ outstanding debt to self-employed workers is close to five billion euros; and in some regions, such as Catalonia and Valencia, cash-strapped workers have to wait an average of almost six months before getting paid.

In fact, even as bank lending has all but dried up, Spain’s government institutions, whether at the national or regional level, have barely lifted a finger to help out struggling self-employed workers or small and medium size enterprises (for more information about the reality of doing business in Spain, click here).

Quite the contrary, in the last year or so the government seems to have made it its central mission to make the working lives of the self-employed as difficult as possible, primarily by ramping up their tax burden to historic highs.

Take the example of my local hairdresser, who now has to pay 21 percent sales tax (compared to 8 percent a year ago), 21 percent income tax (compared to 15 percent nine months ago) and a minimum contribution of 250 euros per month to social security (one of the highest levels in the EU which, it’s worth adding, offers zero unemployment insurance and next to no pension coverage).

In an average month she might clock up somewhere in the region of 2,000 euros in gross earnings — pretty standard fare for workers in Barcelona. She would then have 420 euros deducted in sales tax, another 420 in income tax and 250 in social security, leaving her a grand net total of 910 euros (although she can claw back a small proportion of her outgoings on VAT).

In a perfect world she might be able to share the increased tax burden with her customers by raising prices. But present-day Barcelona is not a perfect world, no matter what some Catalans might tell you. With money tight and competition fierce, especially from the countless Chinese-owned beauty salons offering the same services at a fraction of the price, there is little she can do but absorb the extra costs.

Government Shakedown

My hairdresser is just one of millions of people struggling to endure the government’s latest tax shakedown. Taxi drivers, driving instructors, electricians, photographers, translators, lawyers, architects, accountants… all have to hand over close to 50 percent of their earnings to the state, regardless of their level of income, making Spain one of the most expensive and hostile environments in Europe for the self-employed.

Clearly, there’s much more the government could do to improve the panorama for the self-employed. It could, for example, follow the lead set by the French government and award a one-year social security amnesty for first-time self-employed workers. Such a measure would potentially offer a huge incentive for people on the dole to take the first tentative steps toward setting out on their own while in the process putting an end to their dependence on government assistance.

But Rajoy’s supposedly business-friendly government appears to be completely unsympathetic to the needs of down-at-the-heel family businesses or struggling self-employed workers, preferring instead to waste vast sums of public money on propping up floundering debt-burdened corporations and banks.

Going Underground

Given the lousy deal forced upon its dwindling ranks of self-employed workers, it’s hardly any surprise that Spain has one of the largest and fastest growing submerged economies in Europe, as more and more professionals and wannabe entrepreneurs are priced out of the official economy by the country’s extortion-ate tax regime.

It also helps explain why widespread social breakdown is yet to occur, since the number of unemployed — while still worryingly high — is almost certainly smaller than official figures suggest. Indeed, according to some estimates, as many as two and a half million people may be working in the unofficial economy, some of whom no doubt figure among the government’s unemployment statistics.

In a special report on the issue in 2011, the Financial Times argued that juststating this fact clearly would improve the country’s image with markets and should spur a massive anti-corruption initiative from the incoming government” (little did the FT‘s hacks know that when it comes to corruption, embezzlement and tax evasion, no one can hold a candle to Rajoy’s government).

But it’s not only Spain where workers are increasingly going off-grid. The OECD recently forecast that by 2020 two-thirds of the workers of the world will be employed in “System D”, the somewhat chilling, Orwellian term frequently used these days to describe the underground economy.

In other words, the fastest growing part of the world economy is that which is outside the reach of the measurement and control of central governments. But perhaps that’s not such a bad thing, so long as governments like Rajoy’s and supranational institutions like the EU continue to function as unaccountable, self-serving, bank-beholden parasites feeding off the life-blood of the productive economy. Contributed by Don Quijones.

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