How Spain is planning to penalise the self-employed and become less attractive to digital nomads

The Status Quo

For some time now, there has been talk about a possible reform of the so-called autonomo system in Spain, i.e., the social security contributions that the self-employed have to pay each month. Up until now, autonomos pay a fixed quota between about €300 and €1250 per month. The actual amount is not coupled to your earnings but can be chosen freely from within the above range; essentially the higher the quota you chose, the higher your benefits (sick pay, unemployment benefit, pension). The obvious problem with this system is that these amounts are completely decoupled from a person’s income, e.g., a self-employed earning €4000 a month could elect to pay only €300 which would correspond to deductions of just 7.5%; in contrast, someone working only part-time or earning the minimum wage (currently about €1100) would loose 30-50% of their income even with the lowest quota of €300.

The large majority of self-employed are paying the minimum of €300 which does not provide them with sick leave or unemployment coverage, and their future pensions will be too low to live of without an additional source of income.

The New System

The current Spanish minister for social security proposed the following scheme:

Figure 1. New social security contributions for different income ranges (left-most column) as per the initial (propuesta anterior) and revised (nueva prupuesta) proposal by the Spanish Minister for Social Security, José Luis Escrivá.

Depending on your monthly income you would have increasing monthly social security payments. The initial proposal consisted of 13 income brackets and resulted in a maximum tax + social security burden of 55% for an annual income of only €49,000. This initial scheme was revised by eliminating the top two income brackets and raising the cost for the lowest income bracket (changes marked in red in Figure 1). E.g., if you earn €3200 per month, you are already in the top income bracket of the revised scheme and your monthly social security payment would be €991.44 (corresponding to a whopping 31%). To the best of my knowledge there is only one country where this percentage is higher: France. There, as a self-employed professional you must choose between paying about 22% of your turnover (!, i.e., without being able to deduct business expenses) to social security (micro-entrepreneur scheme) or you choose the other (and in no way less painful) alternative which is to pay an incredible 45% of your after-expenses income (régime réel) to social security. I guess this is probably as business-unfriendly as it gets. For comparison, in Germany there are no compulsory social security contributions at all for the self-employed who only require a private health insurance which costs between €200-300 per month. Returning to Spain: Here, unsurprisingly, the proposed changes have been met with considerable opposition from the self-employed community, especially since the government has so far failed to define what they will consider “monthly income” under this scheme, i.e., whether they will allow autonomos to deduct business expenses to calculate their income. The proposed schemes would result in the following deductions:

Figure 2. Monthly social security (SS) payments in Euros (left panels) and as a percentage of the actual income (panels on right) for a range of incomes.

In other words, autonomos with monthly earnings of <€500 would have to make social security payments that amount to >40% of their income. At the same time, someone earning €2330 “only” pays 25.6%, and if you earn just one Euro more, i.e., €2331, you will pay 31%. The lowest percentage will be paid by the highest income earners (e.g., if you earn €7500 you pay only about 13%). While the reform was brought in to increase fairness, I fail to see how these seemingly arbitrary rates would achieve that goal. It is also not clear why this scheme uses fixed income brackets instead of a fixed percentage which would prevent these jumps seen in Figure 2. Together with the income tax, autonomos may be looking at overall deductions of the order of 45%. In most Western European countries you would need to earn at least €80-100.000 per year to reach the maximum tax and deductions level; in Spain you reach this level already for the rather modest income of €38,300. In fact, if you do earn €80,000 as an autonomo in Spain, your overall deductions would only be 38%. Go figure!

Another problem I see with these high deductions is that people in Spain perceive their local authorities as inherently corrupt and incompetent, which not only explains the low tax morale in this country, but also implies that people here will be very reluctant to give 45% of their income to a government that they perceive as non-deserving and as mismanaging their money.

The Social Justice Argument

One of the arguments for this reform was that autonomos should have the same level of deductions as an employee (employer + employee contributions combined), thus creating a system that would be more just. While we have already seen above (Figure 2) that these arbitrary quotas are anything but just, also this last argument, albeit seemingly plausible at first, falls short of the fairness principle as it neglects some significant differences between the employed and self-employed: Employees typically only need to work 5 days per week for about 45-46 weeks per year to receive 52 weeks of salary. In contrast, autonomos need to work 52 weeks per year (including the occasional weekend) if they want to have a salary during all 52 weeks of the year. In addition, autonomos have the added burden of continuously having to procure clients, spend time on bookkeeping, collecting VAT, and submitting quarterly returns while having absurdly high fines (considered disproportionate even by the European Commission: slapped onto them by local tax authorities with a near-Francoist fervour for the very smallest of transgressions in a Kafkaesque tax system that even professional accountants struggle to comprehend.

At least in my mind, the effects of this new measure are quite obvious:

  • Those autonomos who can receive cash payments (e.g., local handymen and sole traders) will move even further into the submerged economy, either by not even registering as autonomo in the first place or by leaving substantial amounts of their income undeclared in order to avoid these high social security payments.
  • Autonomos with a 100% online business who cannot leave income undeclared because they receive 100% of their payments in electronic form will either leave the country altogether (with these new Spanish rates they would be better off financially in France or Germany where they would also have a much better social security coverage) or simply deregister here and establish entities (bank accounts, companies, etc.) in other jurisdictions.

We could also look at the social justice argument from a different angle. Say you have savings of about €500,000 which you invest in the stock market. You live off dividend payments and from occasionally selling off some shares (while keeping the principal of 500 k€ untouched – thus allowing you to maintain this lifestyle in perpetuity). To be able to make comparisons with the following paragraphs, say the yearly income from this (work-free) investor lifestyle is €35,000. In Spain, this would make you liable to pay €7,230 in capital gains tax and leave you with a net annual income of €27, 770, thus nearly €8,000 more than a self-employed in Spain who needs to put in >40h per week to generate €35,000 in pre-tax income (see below). At the same time, being a legal tax resident in Spain, the investor type would still be covered by the public health care system, without having to pay any contributions. So much for the social justice argument.

Compared to Other Countries

Based on the image below (Figure 3), Spain already had one of the highest social-security burdens in the OECD before the proposed reform, but with the new contributions, the average percentage for incomes up to €4,000 will increase to almost 31%, the highest value for self-employed in the OECD, especially considering that the values for the other countries correspond to the ratio between mandatory contributions divided by the mandatory contribution base, the latter is typically lower than the average income, which means that the actual percentages are likely lower than shown in the figure below.

Figure 3. Comparing pension and social security contribution rates in the OECD. For dependent workers, contribution rates refer to the effective rates for average-wage earners, i.e., total contributions paid (by employees and employers) divided by average earnings. For the self-employed, contribution rates refer to the rates paid on the mandatory contribution base by self-employed workers with taxable income equal to the average net wage before taxes, i.e., to mandatory contributions paid divided by mandatory contribution base (Source). The red marker corresponds to the average percentage post reform, i.e., the average of the actual contribution paid divided by the net income before taxes for incomes up to €4000 per month (based on the bottom right panel in Figure 2).

To give a concrete example: If you are a digital nomad in Spain and wish to have yearly earnings of at least €20,000 (after tax and social security payments – post reform), you will need to generate income of at least €35,000 per year (after expenses – corresponding to deductions of 43% for a relatively low income).

In comparison, if you want to have net earnings of €20,000 in Germany, you only need to generate a pre-tax income of €27,000 (€24,000 + 12×€250 for health insurance, see Table 1, corresponding to deductions of 25.9%) if you are single, or €24,000 if you are married. Considering that you need to pay for many things in Spain that are free in Germany (e.g., dentists, day-care centres, motorways), you will be thinking twice before choosing Spain as your base of operations.

Table 1. How much income you need to generate (pre-tax earnings) as a (single or married) self-employed in Germany to be left with a certain net income. The “tax owed” column does not include health insurance payments (about €200-300 per month).

The Bottom Line

In conclusion, the proposed reform will mean that anyone earning (or at least declaring) more than the minimum wage (€1125 per month) will have to pay more in social security contributions than before. A fairly modest yearly income of €38,300 will already place you in the top income bracket, leading to a 3.4-fold increase in your monthly social security payments, with overall deductions (SS+tax) that will amount to 45%. The average social security contributions for self-employed with incomes up to €4,000 will be about 31% post reform, the highest in the OECD. At the same time, you will be left with the same low level of social security coverage and political mismanagement of public funds as before the reform. This will have two effects: (1) Those who can receive cash payments (handymen and traders with a local walk-in client base) will move a larger portion of their businesses into the already sizeable submerged economy; and (2) those who receive their payments exclusively in electronic form (usually highly-skilled professionals with an international/online client base) will simply leave Spain (or not come here in the first place), contributing to the brain drain and further cementing the status of Spain as a “country of waiters and construction workers” and a no-go area for skilled professionals or anyone with any kind of professional ambition.

Defending liberal society and the responsibility of journalism and science in times of “alternative facts”

This last week has been quite fun and enlightening as it provided a glimpse of what we can expect from the new US government over the next four years. For starters, there was the first press conference by White House press secretary Sean Spicer. This press conference was interesting for two reasons: (1) Spicer made five statements, four of which were proven to be lies, and (2) one cannot help but wonder why the Trump administration, through its press secretary, decided to start their 4-year term with such easily refuted lies over a topic so utterly banal and petty (attendance figures at the inauguration ceremony). Clearly, Trump has not yet made the transition from rating-obsessed reality TV star to head of state. As usual, the internet reacted promptly and in kind. Within minutes, twitter handles like #SpicerFacts and #SeanSpicerFacts had been created and were starting to trend.


There is quite possibly no better way to loose your credibility as a government after just 1 day on the job. If these guys are prepared to lie so blatantly about issues that are utterly irrelevant to anyone and anything other than Donald Trump’s ego, how are we ever going to believe them once they talk about issues that really matter and where the truthfulness of their statements is more difficult to verify!
Continue reading “Defending liberal society and the responsibility of journalism and science in times of “alternative facts””

The widening wealth gap and why demagogues like Donald Trump are on the rise (again)

This week Donald Trump has been sworn in as the 45th US president and it was a truly historical event. Never before has a US president been so unpopular even before taking office. Usually, the week preceding inauguration and the first days in office are the honeymoon period for any new president during which they enjoy high popularity ratings. Not so for Donald Trump. Due to his divisive and openly hostile campaign, he could feel the stiff breeze of opposition right from the very minute he took office. Not only was the popular turnout at the inaugural ceremony very low, but millions of people took to the streets to protest against the new president even before he had enacted a single policy. And like any good demagogue worth his salt, what did Trump do when this rather inconvenient truth stared him in the face, he of course denied it calling all media outlets “dishonest”.

Trump inauguration
Top: comparing public turnout at the Trump inauguration (left) with Obama (right). Bottom: protesters against Trump on inauguration day.

While many people are still rubbing their eyes in disbelief about how a simpleton egomaniac without any political agenda other than “make America great again” could rise to power, his success, if seen in context, is not really such a surprise after all.
Continue reading “The widening wealth gap and why demagogues like Donald Trump are on the rise (again)”

Careless reporting on climate change and the growing threat to science

Today I came across this article on the BBC where the headline reads Climate change: Fresh doubt over global warming ‘pause’.
First off, you will notice that the headline mentions words like “doubt” and “climate change” very close together. In fact, you have to read this headline very carefully in order to understand its correct meaning and have a certain amount of background knowledge to understand the word “pause”. Most people will only quickly browse the headlines, and with a majority this headline will have registered along the lines of “fresh doubts over global warming”. You actually only have to change a single letter, the “p” from pause to a “c”, and you are there. Well done BBC! It is actually quite clever if your intention is to have most headline-shoppers walk away with the wrong impression, strengthening the doubt agenda, while still being able to maintain the appearance of unbiased journalism as the facts are reported correctly in the article. This is shoddy editing at best, or shameful journalism at worst, but either way not helpful in an already difficult debate.

Why not use a less ambiguous headline like: “Scientists confirm: global warming at constant rate since 1950” or something along those lines. This is clear and leaves no reason for doubt (pun intended)! Because if you do take the time to read the article, Continue reading “Careless reporting on climate change and the growing threat to science”

Generals and Billionaires

Many people who thought that US president elect Donald Trump was only bluffing and things couldn’t possibly get as bad as he appeared to be during the campaign had a sore post-election awakening because things are actually far worse than expected. Looking at his cabinet nominations, I can’t help but wonder how the white working class who helped Trump win this election feel about their new “anti-establishment” “swamp-draining” representatives. It is a cabinet of horror, let’s see:

Trump’s cabinet of horror

  • Wilbur Ross (Trade and Commerce): This guy made a fortune by buying ailing companies, running them all the way into the ground and selling off the pieces. He is also known as the “king of bankruptcy” and Continue reading “Generals and Billionaires”

Climate change and the culpability of people like Donald Trump

Being a scientist myself, it has been bugging me for quite some time how people who clearly have no clue of the scientific method, analytical thinking in general, or climate science in particular, are trying to weigh in on the debate about global warming. I do not mean to sound elitist, but this is not like choosing which curtains fit better with the bedroom carpet, a subject on which certainly everyone is entitled to an opinion. Science is different because science is not about uttering opinions and gut feelings but about finding facts and proving them. For most scientists it takes somewhere between 10-15 years of training (3 years for the BSc, another 1-2y for the MSc, 3-5y for the PhD, and how ever long it takes as a post-doc) before you finally get a permanent position and are allowed to lead major research projects. So if some guy with a 3-year undergraduate degree in economics – aka Donald Trump – feels like he needs to weigh in with statements like:

“[climate change is] an expensive hoax”, “a concept…created by and for the Chinese”, and pure “bullshit” – Donald Trump

we should

  1. identify him as the tosser that he obviously is for saying things like this about an important subject he clearly knows absolutely nothing about, and, more importantly
  2. not elect him president of a country … duh!

Continue reading “Climate change and the culpability of people like Donald Trump”

On demagogues, nationalism, populism, religion, and other weaknesses of the human condition

In a world of post-truth politics, alt-right, and death-by-selfie (seriously?!), some people may feel worried and increasingly alienated by a culture or country they no longer recognise as their own. Although less than two generations have passed since the likes of Hitler and Mussolini, it appears as though what happened in the 20th century, the bloodiest in human history, is all but some distant parallel universe where people existed in black-and-white. What many did not believe even remotely possible some 10-15 years ago, seems to be unfolding in front of our very eyes: a reversal of cultural and socio-political achievements (workers’ rights, tolerance toward people of other religions, races, or sexual orientations, etc.), a renunciation of reason and progressive politics. Instead, religion is on the rise again and we can witness the return of the age of the demagogue, with U.S. president-elect Donald Trump as their new poster boy.

A (non-exhaustive) list of present-day demagogues.

Continue reading “On demagogues, nationalism, populism, religion, and other weaknesses of the human condition”

Crisis? What Crisis? Housing prices in Barcelona on the rise again.

Although the unemployment rate has only slightly dropped below the 20% mark, a new housing bubble seems to develop with prices well on the rise.

A new housing bubble is developing in Barcelona


For the example of the Sant Martí district, the following graphic shows how rental prices have gone up during the past 12 months. On the fotocasa and Habitaclia websites (Spanish real estate portals for renting and buying) prices have begun to rise significantly in August/September 2016, yielding increases of 7-8% in a single quarter respectively. If we extrapolate this to August/September 2017, we obtain a 12-month increase in rents of around 30%!

Continue reading “Crisis? What Crisis? Housing prices in Barcelona on the rise again.”