Simplification and Decentralization of the Income Tax

Abstract

This article presents a new type of welfare-improving tax reform model aimed at simultaneously achieving simplification and decentralization of the personal income tax. This model is based on the results of Pfähler and Dardanoni and Lambert and comprises two elements. The first one is the transformation of the income tax into an equal-yield flat tax. The second one is a reduction of the central taxation in proportion to posttax income in order to vacate a space that may be utilized by subcentral jurisdictions through a surcharge applied on the central tax liability. The theoretical proposal is illustrated with a microsimulation exercise on the Spanish personal income tax.

Personal Income Tax Decentralization, Inequality, and Social Welfare

“…3. In Badenes et al (2001), we also designed a model for the decentralization (and simplification) of a personal income tax (PIT) but within a different welfare framework.…”

“…From amongst the most recent contributions, those of Wellisch (2000) can be recommended. 2 Regarding the use of equivalence scales and their normative foundations, it is useful to consultEbert (1997Ebert ( , 1999Ebert ( , 2000 and Moyes (2000, 2003).3 InBadenes et al (2001) we also designed a model for the decentralization (and simplification) of PIT, but within a different welfare framework.4 In our opinion, this conclusion is highly debatable. If the legislator introduces a differential treatment in PIT between individuals, this is because he or she considers that, even having the same income, the individuals belonging to a particular group have greater needs and, as a result, a lower ability to pay than the individuals belonging to the other group.…”