Spain’s Socialist prime minister, José Luis Rodríguez Zapatero, recently vowed to eliminate the wealth tax if reelected. Indeed, Zapatero said it would be his first priority in a second term. Levied by regional governments on an individual’s property and other assets, the Spanish wealth tax brings in about $2.1 billion in annual revenues. At a seminar in Madrid, Zapatero, a dove on foreign policy and a leftist on social issues, said that “there is room for more tax reductions.” His proposals are competing with those of Spain’s center-right opposition party, the Partido Popular, which wants to abolish the income tax for all Spaniards with incomes of less than 16,000 euros per year, a group comprising about 7 million workers and retirees.

In justifying their push to abolish the wealth tax, the Socialists say it was created in 1977 as an extraordinary—and temporary—measure. With a top rate of 2.5 percent of a citizen’s wealth and property per year, the Spanish wealth tax is among the highest in the world. It penalizes savings and thrift. Moreover, due to creative accounting, it is one of the easiest taxes to avoid and therefore tends to ensnare middle-class Spaniards rather than the wealthy. Zapatero told the crowd gathered in Madrid that he considered abolishing the wealth tax a “most just” move, since it would ensure that “saving is longer punished.”

Spain is already benefiting from substantial corporate tax relief. The Spanish finance minister, Pedro Solbes, is gradually reducing the corporate tax rate for large corporations from 35 percent to 30 percent, with the 30 percent rate becoming effective in 2008. Solbes has also slashed the rate for small businesses from 30 percent to 25 percent. There has been income tax relief as well: this year the top rate was trimmed from 45 percent to 43 percent.

‘A tax-cut war is spreading across Europe,’ Bloomberg News reports, ‘as leaders of the Continent’s biggest economies give up criticizing smaller neighbors for cutting business-tax rates and decide to join them instead.’

By cutting taxes, Zapatero has built on the reforms implemented by Prime Minister José María Aznar, his center-right predecessor. Aznar, a committed Atlanticist who urged other European nations to introduce structural economic reforms, left his successor with a prosperous economy and a sizable budget surplus. Though it has increased spending, the Zapatero government has maintained a healthy surplus (in excess of 1 percent).

In its drive for corporate tax relief, Spain is part of a broader European trend. “A tax-cut war is spreading across Europe,” Bloomberg News reported this past May, “as leaders of the Continent’s biggest economies give up criticizing smaller neighbors for cutting business-tax rates and decide to join them instead.”

In recent years, the Netherlands has cut its corporate tax rate from 34 percent to 25 percent. Effective January 1st, Germany will slash its corporate rate from 38.7 percent to 29.8 percent, while abolishing a number of complex deductions in order to mitigate the budgetary impact. Germany’s hitherto high corporate tax rates have led to spectacular evasion, with companies hiding an estimated $82 billion per year from the taxman. Cutting rates will help change this. Plus, as Germany’s center-left finance minister, Peer Steinbrück, has said, “This corporate tax reform will make Germany a more attractive place for investment.”

In Denmark, the center-right government of Anders Fogh Rasmussen this year cut the corporate tax rate from 28 percent to 25 percent. In order to limit the budgetary impact, the government introduced a ceiling on deductions of business interest expenses. In the United Kingdom, the corporate tax rate has declined from more than 50 percent in the early 1980s to 30 percent today—yet tax revenues are surging. Given that the tax rate is low by recent historical standards, the spike in revenues prompted a group of British economists to write a paper asking, “Why has the UK corporation tax raised so much revenue?” Recognizing the success of lower rates, British Prime Minister Gordon Brown has announced that the corporate tax rate will be reduced from 30 percent to 28 percent in April.

Across Europe, policymakers from all sides of the political spectrum are warming to corporate tax relief even as they remain solidly committed to egalitarian ideals. It will be interesting to watch the effects on revenue collection. Most governments assume that cutting tax rates will leave them with less money to spend. Yet recent history shows that quite often the opposite is true. Lower tax rates don’t necessarily mean less tax revenue. If Europe’s present tax cuts lead to a demonstrable increase in revenues, it might be enough to turn some shrewd Social Democrats into egalitarian supply-siders.

Jurgen Reinhoudt is a research assistant at the American Enterprise Institute.

Image by Corbis.