Posting in Design
BARCELONA -- Beyond culture and education, Spanish entrepreneurs are fighting against overwhelming bureaucracy and a distrust of their own government.
BARCELONA -- By the first quarter of 2013, Spain had hit two grim milestones: 27 percent unemployment and more than a million families completely jobless. With numbers like these, why are still so few people trying to start their own businesses?
The Global Entrepreneurship Monitor found in their annual global study of entrepreneurship that there was a decline of new business creation at the start of the crisis from 2008 to 2010, but that 2011 saw an increase by 35 percent, meaning about six percent of Spain's working age population is considered entrepreneurs. However, the GEM report states this jump was due to people creating businesses out of necessity, after their two years of paro (unemployment) checks had dried up. GEM also said that more than half that six percent are self-employed individuals, like architects who, without job prospects, are trying to snatch up what they can.
In February, SmartPlanet published a piece about why the Spanish aren't entrepreneurs, written after talking to about 100 Spain-based start-ups and hearing the same refrain: it's incredibly difficult to start your own business here, you feel alone and odd, and nothing in your life has told you to think differently. Then, we focused simply on education and culture, but today, we tackle what many entrepreneurs say is the biggest obstacle for los emprendedores en España: the government.
Spain ranks 44th on the World Bank's Ease of Doing Business Index, well behind most European countries, except for Greece and Italy. It is expensive and patience-prohibitive to be an entrepreneur in Spain. Before you even start, you have to jump through an absurd number of hoops, fill out tons of paperwork, wait for signatures, and pay fees and taxes, long before a profit is even envisioned. The World Bank also ranks Spain as 136th worldwide for ease of starting a business, with a cost of about €1,000 in public paperwork that takes more than a month to process.
"It is actively penalized by the tax and bureaucracy systems to be an entrepreneur or self-employed in Spain and the start-up costs are huge compared with most other countries," said Graham Hunt, a Brit who has spent his adult life working as an autonomous real estate broker in Valencia. "Therefore, most budding businesses are strangled even before birth because the initial setup costs too much in both time and money."
First, the country almost punishes entrepreneurs with heavy taxation from the get-go. If anyone earns the Spanish minimum wage of €645.30 a month for a regularly waged job, they are required to pay Social Security tax. However, autonomos must pay taxes, no matter what. Social Security -- the bulk of taxes that go into one pot to fund universal healthcare, pension and unemployment -- is decided not based on income or profit, but on what you do, with different tax rates allotted for different sectors. The average payment starts at between 260 and 300 euros a month. Keep in mind that 60 percent of Spain's employed population are Mileuristas, earning about a thousand a month. In addition, these businesses must pay value-added tax, which, in September 2012, went from as low as eight percent to the 21 percent it is today, although this number also varies by sector. This means that, in the last year, most freelancers and small businesses had to pass that sizable increase onto their clients during this economically unstable time.
Both social security and VAT tax have to be paid, whether or not a business makes any profit, with one in three Spanish start-ups failing within the first year, according to Regus, the international business center supplier. Also, under current law, companies often have to put up the money to pay their quarterly VAT, since Spain's invoicing period is typically more than 60 days and VAT is paid based on invoiced not received. However, Prime Minister Mariano Rajoy has stated that starting in January 2014, small and medium-sized businesses and the self-employed can defer their VAT payment until they have banked the invoices.
The current tax law also doesn't consider the irregular income of freelance and cyclical jobs. If an individual or business, like those in the tourism industry, has higher profits one month, the next month its RPF, or income tax, will be higher, even if the earnings drop to the previous rate. For reasons such as these, many choose to do at least part of their business under the table; the Spanish black market is predicted to be underestimated at around 20 percent of the total economy. Unemployed entrepreneurs are entering this informal economy in droves as they offer companies less expensive services; however, a year ago, the government started fighting back, by limiting cash transactions with "at least one professional entrepreneur" to €2,500.
Spain also lacks flexibility in employment categories -- you can either have a full-time job or be autonomo (freelance), but not both. This means that people that do work on the side of their day job either do it under the table or they are getting creative with the system in order to invoice. For example, graphic designers, architects and other creatives who tend to do extra work on the side will list themselves as a regular employee of a company 11 months a year and, on their one month of vacation, they'll change their employment status to autonomo so they can invoice their clients. With that 60-day invoice period, someone trying to start his or her own business on the side could potentially not get paid for services up to 14 months later. It makes for an impossibly slow return on investment that leads to many entrepreneurs working partly under the table.
Spain, along with Italy, has the most expensive and challenging set of patent laws in Europe. While the rest of the E.U. signed off last year to allow companies and individuals to apply to patent inventions and ideas within a common European system, Spain and Italy declined, saying it wasn't fair that applications couldn't be filed in Spanish or Italian. The consequence? The two countries continue to have patent laws that cost inventors 18 times that of the United States and 60 times more than China.
Through numerous interviews with entrepreneurs and polls like this asking what is the most challenging part of being an entrepreneur in Spain, this SmartPlanet writer has found that start-up founders have a myriad of answers -- the challenge of finding business partners, the negative attitude, lack of support, and so forth -- but, about half the respondents say the laws are too complicated and the taxes are too high, with about another quarter voting that they distrust the government.
It has been theorized that corruption has a significantly negative impact on entrepreneurship, raising the cost and challenges of doing business even more -- and recently Spain has seen its share of high-level corruption. Rajoy and a number of the ruling Popular Party have been accused of not paying taxes on upward of 36 million euros. The royalty's not any better, with, most recently, the king's daughter Infanta Cristina getting subpoenaed to testify about her husband Iñaki Urdangarin, who is accused of embezzling six million euros from his so-called charity. (Let's not even talk about the king going elephant hunting last year.)
Spain is known for having a culture of amiguismo or cronyism, which The Guardian's Madrid-based columnist John Carlin refers to as the Spanish disease -- doing business is not about experience or even what you know, but about who you know. Recently, the majority of Spanish media has been pointing to amiguismo and unmotivated politicians as a major cause of the seemingly endless recession.
This distrust in the nation's leaders has been passed down to Spain's uninspired youth, who are now being called Generation Zero or the "ni-nis," referring to how they have neither full-time jobs nor are in school, living at home well into their thirties. Last year, 70 percent of the Spanish youth said they'd consider moving abroad, while the Spanish National Statistics Institute found that twice as many of Spain's youth are currently emigrating than were in 2010, heading toward an imminent brain drain.
"This is the least hopeful and best-educated generation in Spain," said Publico newspaper columnist Ignacio Escolar. "It's like a national defeat that they have to travel abroad to find work."
With about 60 percent unemployment for youths 30 and under, parliament is working to help this age group. Laws are making it less costly for men 30 and under and women 35 and under to be entrepreneurs. Similarly, the government is offering incentives to hire the same group. As a result, older, more experienced people are being turned down for jobs.
Only time will tell if the Rajoy administration will change legislation to make Spain more open to entrepreneurs.
Jul 7, 2013
This is a great article. For my own case I find it quite depressing. I would love to be able to have Full time employment & my own company too. Can't face even trying to set up a company, work all my leisure time and hand all the income to the government as well as paying taxes on my day job income too. Very frustrating that Spain stifles any hope even before some businesses are created. All we can hope is than things change for the better with these tax rules.
There is this toxic myth floating about in the US that taxes and government are holding back the country. If so how come that three Scandinavian countries, (Norway, Denmark and Sweden) with blended economies and some of the highest taxes in the world score number 1, 2 and 3 on the 2012 Legatum Prosperity Index and the US scores number 12? See link to study; http://www.prosperity.com/Default.aspx Most studies back up the idea that the U.S. has lost the upper hand for upward mobility to Europe and Canada over the last several decades. If the US desires to once again become the preeminent leader in quality of life, well just like any addiction, you must first face facts, reject the political dogma and then do what the science indicates and then you will once again regain the heights of prosperity and quality of life. Just to start you on the path, let's slay one myth regarding who the "Job Creators" really are, see link to short video; http://www.youtube.com/watch?v=CKCvf8E7V1g If not then contemplate what a famous Nobel Laureate economist said; "If you wish to live the American dream of upward mobility, then move to Denmark. antiguajohn
There may be some reasons not stated in the text: a-Industry and banking is a family affair, if you don't have the right connections, you won't be allowed starting something bigger than a honky tonk beer bar. b-If you discover something new, you may find someone else with more capital, coming from unknown sources, that would open a similar business in front of yours, but improved or practising dumping, and this will take away your customers. c-businessmen or women are capitalist abusers, so, if you don't have the righ set of ideas, unions won't let you go on, or they would sabotage you if they can. d-there are many local versions of the Mexican 'mordida'. e-why are you going to start a business, if you can apply for a lower income, but lifetime employement in state agencies and bodies, were you can stay unless you put in risk the illegal ways of others for having much more money than the higher salary in the administration would pay, just by transfert of funds or contracts to your account or to your friends' and relatives? f-Let the rest of the world invent! g-One of the two Spains will freeze your heart. h-If you want to be happy as you say, don't analyze, boy, don't analyze. i-Only kids, insane and those about to die say the whole truth, I don't want to be put in any of these categories. j-We have a 'crisis of confidence in the institutions', but this is what those who occupy the state say, the issue is that many are realizing what's inside the spanish government, there's a crisis of confidence in politicians; as an example, the women acting as minister of economy with the communist J L Rdz Zapatero, had Salgado as surname, exactly as the general Franco's grandmother, this is not an accident or a meaningless coincidence, and this may apply to every political party you look in.
is just a decade or two ahead. Most countries in Europe have dependent societies, meaning that, the people voted for the easy life. But, that easy life has a way of eventually destroying the underlying economy. The symptoms in Spain and Italy and Greece are undeniable, and those countries have unsustainable burdens, but those burdens will continue to persist, since the people can't even envision a country without big government to take care of them; therefore, they're stuck with going the route of total destruction of whatever parts of the economy might still be hanging around. Dependence is very expensive, and to support it, government has to extract as much from the economy as possible, even to the point of taking whatever profit there might be in the economy. Without any profits, there can't be growth, and without growth, there can't be any opportunities for the unemployed or the young just starting to look. Spain might as well declare total bankruptcy and hope that it can start all over. There is no other prospect for the country. Unfortunately, the U.S. is headed in the same direction, and the signs are all over the place, including the national debt of $17 trillion, and the annual federal deficits of $1.3 trillion. The unfunded mandates go into the hundreds of trillions. That is an economy which is basically going down the crapper quickly, but the feds are hiding the facts by continuing to spend like drunken sailors, and by devaluing the currency. It's all about delaying the inevitable, and the inevitable is that, we'll be like Spain and Greece and Italy, in due time.
Apparently, one of the 'failures' is that one in three businesses fail in the first year. Why is that even mentioned? 80% of new companies in the US fail within two years and that is apparently a good thang.
I am still convinced the US tax code is far too large and needs simplification, but it is a hopeful sign that countries like Spain have taken punitive progressive tax rates to an insane level of absurdity. Doing so, it should now be obvious to the world that the progressive tax systems pushed as being "fair" are anything but fair. Maybe this is why the early founders of Massachusetts banned progressive state taxes in the State Constitution. Which is an ongoing source of entertainment listening to Gov. Patrick (D) lament on how difficult it is to govern without a progressive tax. Even in ubr liberal Massachusetts progressive income tax will not happen. The rich politicians will never allow it. LOL. Like them or not, progressive taxes have been proven to be unsustainable without causing long term systemic damage to a nations economy. Maybe cooler heads will prevail in the US and our bloated tax code full of punishing punitive taxes and sweetheart tax loop holes for the politically connected can be simplified into a system that is broader based and less prone to corruption easily hidden in the current tax system.
All of those studies, like this one from late 2007 early 2008, predate the European debt crisis and the crash of the global economy. http://www.outsidethebeltway.com/usa_ranks_22nd_on_stable_prosperous_countries_list/ They bought their "prosperity" on national credit cards while living under military protection paid for by US tax payers. If the US is not careful we are headed down the same road because of people pushing for European style socialism.
Agreed. Reject the political dogma indeed! What has the last dozen-or-so years of neo-Keynesian fiscal and monetary policy brought the US other than more people on food stamps than employed and a irredeemable national debt? And what is the prescription from the political class to resolve this? More of the same? Meanwhile, the European countries you idolize continue down their unsustainable economic and demographic paths. Oh, and BTW, your impression of Scandinavia is dated from the '80s. They've since realized that their socialist paradigm is doomed, and are now striving to become more free-market oriented than we are. At what point can we consider this insane?
In the U.S., there is no lack of education, and equality is something that can't be force on people, though it hasn't been a problem to the ambitious and clever and capable. You might be thinking of a different country, because, in the U.S., the conditions for the creative mind exist, and and entrepreneur spirit abounds, and the innovations are plentiful. What has made the U.S. go south, has been the very big and intrusive government, with high taxation and a humongous number of business stifling regulations. The U.S. has the highest corporate tax rates in the world, and it also has one of the most regulations-happy governments in the world. Both of those are the biggest reasons why there is so much outsourcing to other countries by U.S. businesses. Also, comparing small countries, like Sweden, Norway, and Denmark, to a country the size of the U.S., is like comparing grapes and watermelons. Not the same size, and not the same problems. Those countries in Europe are about the size of some American cities (population wise), and so, their problems are a lot easier to manage, and not near as complex. Try comparing apples to apples next time; or at least the same size fruits, like apples to pears. ;) BTW, that video and the speakers are just pure garbage too. Without the rich, no country could ever create more wealth. The wealthy are the investment class, and they didn't all get wealthy by keeping their money in the bank or burying it in their back yards. Money begets more money, and those who have it will mostly reinvest it. The poor and the working class do not create wealth. They working class are just part of the assets necessary in order for a business to create wealth, and wealth is what creates jobs. The entrepreneur and the investors and the risk-takers, are the necessary ingredients to creating a working economy that creates jobs and wealth. Nothing else works. Yeah, people can work for themselves and create other jobs, but, what grows an economy is the businesses that create more wealth, and not just jobs which only pay for the basic necessities of the working class or the employers.
Startup costs are on average lower in the US. As stated in the post, government fees among other things make startup costs higher in Spain. Being cheaper in the US more people try to start businesses. The US also has more repeat startups. I know 2 people who failed the first time, learned from their mistakes and succeeded the second time. Another friend started 4 businesses in 3 years. She was a success in all 4. She sold them to fund her next bigger scheme because she enjoyed the challenge. Half the people who bought her companies went under because they got in over their heads. Under the conditions described in Spain you will never see a person like her.
There's little question about it; our current [i]"bloated tax code full of punishing punitive taxes and sweetheart tax loop holes for the politically connected"[/i] is working just fine, for the [i]"politically connected"[/i]. Why would they allow the status quo to be changed? The current state of affairs is currently working for somebody, be it in Spain or here in the US. Meanwhile, like the hapless non-government-employed Spaniard, non-connected Americans continue to tread water or languish. Last Friday's jobs report was just another in a long-running list of Progressive failure.
...that there will be someone else willing to pick up the tab for our military protection as we did for everyone else.
I've abandoned my thoughts of my own business here in the USA. It may be better here than in other countries, but it's still not a good business environment. Between all the taxes, regulations, and licensing fees, getting off the ground is insanely expensive. I'm starting to think that the only way one can ever get a successful business started these days is by being a crook. If I bent some laws and pretended to be ignorant of some of the laws, well, sure, *then* I could make a go of it. However, for those of us that hold ourselves to a high ethical standard and won't stoop to criminal behavior, forget it. Ain't gonna happen...
...where you can conduct business cheaply, unregulated and unfettered, as long as you fit the proper demographic: [i]"It is almost as if the more California regulates, the more it does not regulate. Its public employees prefer to go after misdemeanors in the upscale areas to justify our expensive oversight industry, while ignoring the felonies in the downtrodden areas, which are becoming feral and beyond the ability of any inspector to do anything but feel irrelevant. But in the regulators defense, where would one get the money to redo an ad hoc trailer park with a spider web of illegal bare wires? We hear about the tough small-business regulations that have driven residents out of the state, at the rate of 2,000 to 3,000 a week. But from my unscientific observations these past weeks, it seems rather easy to open a small business in California without any oversight at all, or at least what I might call a counter business. I counted eleven mobile hot-kitchen trucks that simply park by the side of the road, spread about some plastic chairs, pull down a tarp canopy, and, presto, become mini-restaurants. There are no facilities such as toilets or washrooms. But I do frequently see lard trails on the isolated roads I bike on, where trucks apparently have simply opened their draining tanks and sped on, leaving a slick of cooking fats and oils. Crows and ground squirrels love them; they can be seen from a distance mysteriously occupied in the middle of the road."[/i] http://www.nationalreview.com/articles/255320/two-californias-victor-davis-hanson I've been to many of these places and shared the same experiences. It's like a 3rd-world country hidden inside the most affluent and regulated state in the world.