No income tax or VAT: How Franco funded public spending

No income tax or VAT: How Franco funded public spending

How do you sustain a state without an income tax or a standard VAT? Poorly, with many patches and public spending at half. In Franco's Spain, there was no income tax like today's nor a comparable VAT, yet there were courts, schools, barracks, and a modest public payroll. The short answer: they spent much less, and money came through less visible channels — social contributions, indirect taxes, debt, US military bases, and migrant remittances. The rest is debating how much was engineering and how much was simple administered misery.

The taxes that did exist: from ITE to 2.70% on profits

The idea that nothing was paid is false. In 1957, the Remodelation of the Profits Contribution reorganized the levy: professionals paid a fixed fee or fiscal license, plus 15% on income; individual merchants and industrialists paid 20% on profits; and companies paid a general 30% on profits with a minimum of 20%. On the ground, one participant recalled that the ITE — business traffic tax — was 2.70%, "almost like today's VAT." Others point to a sort of flat tax deducted directly from the payroll, alongside Social Security. Taxation existed; what didn't exist was the term income tax.

Debt, US bases, and migrant remittances

The second pillar was financing from abroad. One line of analysis argues Spain was sustained by US credits in exchange for land for military bases and remittances from millions of emigrants working in Europe. The 1973 oil crisis brought many back, and the tap closed. The harshest version claims there was hardly any public treasury, everything was funded by debt, and tax evasion was huge; that in 1953, when Americans landed, the state was half-bankrupt. The most cynical formula repeated: state bonds, a printing press, and enough revenue to not exceed spending. The institutional narrative adds public debt issuance and private agreements with banks for a percentage.

The state was half the size: 25% of GDP vs. 40% Europe

Here is the arithmetic key. In 1975, Spanish public spending hovered around 25% of GDP, while the EU already exceeded 40%. Taxes on production and imports — equivalent to a primitive VAT, tariffs, and special taxes — summed nearly 7% of GDP; income and property, near 5%; and social contributions, around 10%. The overall fiscal pressure was half of today's. A circulating calculation places state spending at about 700 euros per capita in 1980, versus 14,000 today. A small state, with few civil servants, moonlighting in administration, and cases of civil guards leaving the force to emigrate to Germany.

The pension Ponzi and public companies

Until the 1980s, Social Security was a good business for the state: it collected much more than it paid in pensions, because the population was young and careers short. This surplus funded other items. Added to this were large companies in strategic sectors, mostly state-owned, whose profits swelled public coffers, plus revenue from postage stamps and extra hydrocarbons. The consequence was a market with near-zero unemployment, though with low salaries compared to the rest of Europe.

Dams, motorways, and a flag carrier

Spending went to physical work. They cite dams, ports, airports, labor universities, union parks, a flag carrier, and even 8,000 prisoners. The reply is that most motorways were built in the 1980s and under Franco, national roads predominated. The difference between motorway and dual carriageway, they recall, is mainly administrative and verbal. They debate the network size: nearly 18,000 kilometers of motorways and dual carriageways in Spain versus 4,767 in South Korea, though with very different population densities and areas. From the 1960s, some argue, spending was still low but services resembled current ones: schools, institutes, university, and public health.

Was there hunger, or did people live better than today?

Both, depending on the segment. The 1940s were of hunger and rationing books, with Argentina's 1947 aid as a lifeline and children drinking milk for the first time. Those who remember the civil war claim the country was devastated and the disaster was not just poor management. Those looking at the 1960s describe a worker with a large family, apartment, car, and holidays, and some compare the 1930s tenement — thirty square meters, shared bathroom in the landing — with the three-bedroom apartment of the 1960s. The more skeptical remember that most ate porridge and American food aid, and that assuming one would have been on the rich side is an exercise in imagination.

It fits: spend little, collect via indirect channels, rely on debt, and let future generations pay. The miracle was that half the country couldn't ask for an invoice.