The Carrot Rebellion

November 13, 2012

While the fiscal cliff has us all pondering higher tax rates, we should also think about how taxpayers are likely to respond to these higher rates, especially those who didn’t vote for them. Spain provides a cautionary tale, where a “carrot rebellion” is taking hold as a result of the value added tax going from 8 to 21 percent:

He looked out his window at farmland that surrounds this village, two hours north of Barcelona, and suddenly had an idea: Instead of selling tickets to his shows, he'd sell carrots.

"We sell one carrot, which costs 13 euros [$16] -– very expensive for a carrot. But then we give away admission to our shows for free," he explains in Spanish. "So we end up paying 4 percent tax on the carrot, rather than 21 percent, which is the government's new tax rate for theater tickets."

Classified as a staple, carrots are taxed at a much lower rate and were spared new tax hikes that went into effect here on September 1.

The highest value-added tax rate on things like cars and clothing went from 18 to 21 percent, despite a campaign promise by Prime Minister Mariano Rajoy not to touch the top rate. Sales tax on movie and theater tickets jumped from 8 to 21 percent.

Such tax hikes have sent tens of thousands of Spaniards into the streets to protest every weekend since the new rates took effect.

Pilar Bayé, a civil servant in Bescanó, traveled to Barcelona to take part in the protests. She also bought a ticket -– or rather, a carrot — for a performance next month. "It seems to me like a good idea, because culture shouldn't be taxed so much. Culture should be accessible to all the people," Bayé says.

Spanish media have dubbed this the "Carrot Rebellion," and the Bescanó theater has won kudos from arts advocates nationwide. Shows are sold out.

But the theater must also follow the law, says Fernando Fernandez, an economist at Madrid's IE Business School.

"This is called tax evasion," says Fernandez. "I mean, we may like it because it has to do with culture, and we like people going to the theater. But this is called tax evasion."

The Spanish government says tax hikes are necessary to avoid an EU bailout. But Fernandez says that if some people don't pay what they owe, those who do pay will suffer.

"This means that people who do pay taxes have to pay a larger tax. And this makes it more difficult to get the fiscal target," he says. "So we have to denounce this just as much as we denounce the filthy rich who don't want to pay taxes. We should do the same."

Something tells me Spain will not meet its deficit goals.

(Hat tip: TaxProf)

Follow William McBride on Twitter @EconoWill

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