54. The Cost of Catalan Privilege - Jesús Fernández-Villaverde

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Spain’s fiscal architecture is more than a ledger‑sheet debate; it is, as economist Jesús Fernández‑Villaverde, the Howard Marks Presidential Professor of Economics at the University of Pennsylvania, reminds us, the very skeleton of the modern state. Drawing on Schumpeter’s maxim that “the state is taxation and taxation is the state,” Fernández‑Villaverde opens the conversation by weaving the American and French revolutions into a wider argument: when you refashion a nation’s tax machinery, you refashion the nation itself. That lens frames Catalonia’s renewed demand for a new financing model, not as a routine budget negotiation but as an existential redesign of the Spanish state.

Jesús details how Spain already operates one of the most decentralized fiscal systems in the world, “more latitude than most U.S. states,” he notes, yet Catalonia now seeks the bespoke privileges long enjoyed by the Basque Country and Navarra. The Regional Authority Index rates how much self‑rule and shared rule each country’s sub‑national governments actually wield. In its last update the index places Spain as the most decentralized unitary state in the sample and fourth overall among 96 countries. 

Those northern provinces collect every euro on their own soil and forward a modest remittance to the central treasury, a setup that Fernández‑Villaverde brands “a Confederate relic.” Extending it to Catalonia, he argues, would hollow out Spain’s common‑pool finances, deepen inter‑regional resentment and erode the principle of equal citizenship, while turning the national revenue service into little more than a mailbox for provincial checks.

Politics, of course, is the solvent in which these principles dissolve. Prime Minister Pedro Sánchez’s coalition leans heavily on Catalan and Basque votes; hence, the Jesús says, the Socialist leader flirts with a reform that his own party barons fear will be “the kiss of death”. Layer onto that an opaque, labyrinthine funding formula, ripe for local demagogues to blame Madrid or the neighbors, and Spain’s fiscal question becomes not merely who pays, but what kind of country the Spanish want to be.