Income Shifting in the Spanish Dual Income Tax^*

Abstract

Based on a model of behavioural response to taxes, and using the Taxpayers Panel from the Instituto de Estudios Fiscales for the period 1999–2009, we analyse whether the dual nature of the Spanish personal income tax (PIT), reinforced by the 2007 reform, has influenced taxpayers’ behaviour, causing them to convert part of their ‘general income’ (from labour, real estate or economic activities) into ‘savings income’ (from movable capital or capital gains). We also extend the analysis of income shifting and study whether Spanish taxpayers also responded to the different tax treatments given to the two types of savings income (from movable capital and capital gains) until 2007, transforming savings income from one type to the other. The results of our study demonstrate three facts. First, Spanish taxpayers did respond to the different tax rates, shifting income from the general base to different forms of savings, especially capital gains. The highest‐income individuals and the self‐employed and business owners are the groups where this behaviour was most marked. Second, the self‐employed and business owners also turned income from movable assets into capital gains, guided by their different tax rates. And third, we find signs of ‘anticipation’ and ‘learning’ effects caused by the 2007 tax reform. We believe that the results obtained will enrich the growing literature on income shifting.

The Spanish personal income tax: facts and parametric estimates

“…Anghel et al (2018) provide an analysis of changes in income, consumption and wealth distribution in Spain in recent years.6 López-Laborda et al (2018) discusses how this dual tax system creates incentives for the taxpayers to shift their income base from labor to capital.…”

Inequality in tax evasion: the case of the Spanish income tax

“…Income shifting practices could have become gradually more widespread in a "learning" process. On shifting to capital gains income, which was favourably treated, see L opez- Laborda et al (2018).…”

Personal Income Tax Compliance at the Regional Level: The Role of Persistence, Neighborhood, and Decentralization

“…It is true that part of the difference between real income and fiscal income will be due to the existence of legal tax avoidance, but the most significant part of the total gap will be explained by tax evasion because, to a large extent, tax avoidance strategies do not alter the aggregate income reported in each region (although the tax paid will change). One of the most important avoidance strategies in IRPF is income shifting, for example, between labor and capital income (López-Laborda, Vallés-Giménez, and Zárate-Marco 2018), but its effects are neutralized when calculating the total income declared by each taxpayer. Another avoidance strategy is the income splitting among taxpayers, for example, among family members.…”