Tax gap in Spain
June 10, 2025
By Borja Fernández de Vega
The months of June and July in Spain always come hand in hand with two topics that are repeated in many everyday conversations: the high temperatures and the filing of taxes. On this occasion we are going to focus on the latter.
Personal income tax must be filed before 30 June and for legal entities, the deadline for corporate tax is extended to 25 July. But as we all know, these are not the only taxes that exist. They are joined by value added tax (VAT), wealth, economic activities, inheritance and donations, real estate, financial transactions… and many others. Let us remember that the tax burden (tax revenue/GDP) in Spain is around 38%, slightly below the European Union average (approximately 41%). But Spain is one of the countries with the highest increase in tax burden in recent years.
Before discussing further, why and when did taxation emerge? As communities grew and became more complex, new collective needs arose that required common resources. The main needs were to fund government, maintain armies to provide security, build public infrastructure, maintain temples and help in times of famine. The earliest recorded tax system was in Ancient Egypt in 3000 BC and taxes were paid in the form of goods such as livestock, crops or labour (‘taxes in kind’). Since then, it evolved and payments became in money from the Middle Ages onwards.
Since the emergence of taxation, some citizens tried to hide part of their crops or income in order to avoid paying taxes. The shadow economy is therefore not a modern phenomenon, but a historical response to tax pressure. According to the latest published studies, the underground economy in Spain represents approximately 24% of GDP, making us the third country in the European Union with the highest proportion of undeclared economic activity, behind only Greece (36%) and Italy (31%). Specifically, it is the construction sector, followed by the hotel and catering and tourism sectors, which generate almost 50% of this undeclared economy in Spain. The high presence of undeclared jobs is the main contributor to the increase in black money.
This high level of shadow economy can be explained by a combination of different reasons: lack of job opportunities, lack of tax awareness, low confidence in tax management, complexity of the tax system, perceived low quality of public services, insufficient inspections of certain activities, etc. Some of these causes are related to the rulers and regulation, but it is the citizen who finally decides how to act: within the official system or outside the current legality. This situation punishes the honest and benefits the rogue. At certain times, the tax-compliant entrepreneur cannot compete with those who act outside the law.
The tension between the tax burden and the shadow economy in Spain reflects not only a structural problem of the tax system, but also a disconnect between the citizen and the state. Although taxes are essential to sustain collective welfare, today many perceive that the tax effort does not translate into tangible benefits. This perception feeds the underground economy, which acts as an escape valve from a system that is perceived as unfair or inefficient.
The solution requires both structural reforms and a change in citizen awareness. A key idea to move forward is to rethink the relationship between taxpayers and public administration, not only from the point of view of auditing, but also from the point of view of trust. Fostering a culture of co-responsibility, where honest citizens who make an effort see it reflected in quality public services and benefits. Transparency, tax education from an early age and simplification of the tax system are fundamental pillars for reducing the underground economy and strengthening citizen responsibility.