Reforming the Individual Income Tax in Spain

Abstract

We study how much revenue can be generated by more progressive personal income taxes in Spain. We build a life-cycle economy with uninsurable labor productivity risk and endogenous labor supply. Individuals face progressive taxes on labor and capital incomes and proportional taxes that capture social security, corporate income, and consumption taxes. An increase (decrease) in labor income taxes for individuals who earn more (less) than the mean labor income generates a small additional revenue. The revenue from labor income taxes is maximized at an e ective marginal tax rate of 51.6% (38.9%) for the richest 1% (5%) of individuals, versus 46.3% (34.7%) in the benchmark economy. The additional revenue from labor income taxes is only 0.82% higher, while the total tax revenue declines by 1.55%. The total tax revenue is higher if marginal taxes are raised only for the top earners. The increase, however, must be substantial and cover a large segment of top earners. The new tax collection from a 3 percentage points increase on the top 1% is just 0.09%. A 10 percentage points increase on the top 10% of earners (those who earn more than e41,699) raises the total taxes by 2.81%.

Macroeconomic and distributive effects of increasing taxes in Spain

“…This discourages the labor supply of workers (−1.5%), accumulation of capital by entrepreneurs (−12.6%), and the overall output of the economy (−4.2%). These findings are consistent with those of Guner et al (2020) in a model without entrepreneurs. They find that τ = 0.19 maximizes revenue from personal income taxes, while total tax revenue decreases by 1.5%.…”

“…This utility function is consistent with balanced growth and with evidence from panel data that, conditional on education, mean lifetime hours of work do not vary across the distribution of lifetime wages (see Erosa et al 2016). The parameter γ is set so that the Frisch elasticity of labor supply equals 1/γ = 0.5 as in Guner et al (2020), which facilitates the comparability with their findings. The discount factor of time β and the weight of the disutility of work φ will be calibrated endogenously.…”

“…Moreover, capital income in the corporate sector is taxed at a flat rate. Household income taxation Following (Guner et al 2020), I assume that taxation of households' income is determined by three functions: (i) T l (•) determines the tax liabilities on labor income and business income; (ii) T k (•) determines the tax liabilities on households' interest income; (iii) T c (•) determines tax credits to be deducted from the total tax liabilities on all the sources of household's income.…”

“…In a second set of experiments, I follow (Guner et al 2020) to consider reforms that increase the degree of progressivity of the labor income average tax function while keeping the average tax rate constant (tax rate applied to the mean income level). In particular, I change the value of the parameter τ of the average tax function (Eq.…”

Impact of the New Individual Income Tax Reform on Resident Consumption-Based on Empirical Data from Hubei Province

“…Silvia Avram conducted a study on the redistribution effect of individual tax in several European countries through micro-simulation methods, and the results showed that the deduction of individual income tax is more obvious for middle-and upper-income groups [3]. Roberto Ramos, Nezih Guner and Javier López-Segovia found that the more progressive taxes, the lower the work income and quality of life of residents [4]. Li Jing and Niu Xuehong analyzed that the distribution effect of individual income tax income after the 2019 reform has weakened compared to before [5].…”