Spanish Income Tax Research Articles

Correction to: The individual Laffer curve: evidence from the Spanish income tax

Correction to: The individual Laffer curve: evidence from the Spanish income tax

The individual Laffer curve: evidence from the Spanish income tax

AbstractThis paper characterises the Laffer curve of each individual taxpayer in a schedular multi-rate income tax with income shifting. Analytical expressions for the revenue-maximising tax rate and the revenue-maximising elasticity are provided for the individual taxpayer and the aggregate population, as well as new estimates of the Elasticity of Taxable Income. Applying these to the Spanish income tax demonstrates that 44.72% (58.49%) of the taxpaying population in the non-savings tax base (savings tax base) is on the “normal” side of the Laffer curve. On average, these taxpayers are 6.59 points (24.73 points) above (below) the maximum of the Laffer curve. The fraction of total tax revenue lost through behavioural responses amounts to 53.77%. However, this fraction varies by population subgroup and decreases when we account for income-shifting responses, suggesting the presence of fiscal externalities in the Spanish PIT.

The Dynamics of Inequality and Mobility: A Panel Data Analysis of the Spanish Income Tax

AbstractObjectiveThis article aims to analyze the evolution of income inequality and mobility in Spain during the period 1999–2011 by exploiting data from personal income tax returns.MethodsTo assess the evolution of inequality over the period analyzed, we have used some of the many metrics developed for this purpose, each of which offers a different approach depending on the segment of the income distribution they focus on (Gini coefficient, income shares, generalized entropy index, and the Atkinson class of measures).ResultsOur results suggest that, after a period of slightly declining income inequality, Spain experienced a rise in inequality in the years immediately preceding the Great Recession, before falling back to precrisis levels. With regard to income mobility, during this period, it was more common for individuals in the middle of the distribution to experience changes, while those at the top and bottom maintained a more stable position.ConclusionsThe economic boom of the late 1990s and early 2000s, as well as the Great Recession, had a significant impact on income inequality and mobility.

The individual Laffer curve: evidence from the Spanish income tax

The individual Laffer curve: evidence from the Spanish income tax

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

Purpose The purpose of this paper is to estimate tax evasion and its impact on progressivity, redistribution and the measurement of inequality, using microdata from the Spanish income tax for 2001-2004. Design/methodology/approach The approach follows Feldman and Slemrod (2007) by exploiting the relation of charitable donations with the composition of income but introduces two methodological innovations, which could be useful for further studies: correction for sample selection with a Heckman two-step setting and the calculation of different evasion rates for top incomes with an interaction term. Findings Evasion in capital incomes was significant throughout these years. Financial incomes were reported at around 50-70 per cent of their real value, with the lowest estimates corresponding to the top decile. Revenues from fixed capital display similarly low compliance rates for the top 10 per cent. Tax evasion in self-employment incomes (direct assessment) is estimated at 20 per cent for 2001. Mostly because of a composition effect, this means that fraud was higher at the top of the income distribution, thus having a regressive impact. Inequality statistics and top income concentration estimates should, therefore, be revised upwards. Originality/value This is the first paper to estimate the distributive impacts of tax evasion in Spain, and one of very few internationally.

How Did the ‘Dualization’ of the Spanish Income Tax Affect Horizontal Equity? Assessing its Impact Using Copula Functions

The aim of this paper is to assess horizontal inequity (HI) caused by the introduction of a (semi-) dual structure for the Spanish personal income tax (PIT), adopting a copula function-based measurement framework. Following Bo et al. (2012), we estimate the Clayton, Frank and Gumbel copulas, belonging to the Archimedean class, to quantify the impact of the 2007 Spanish PIT reform on HI, comparing it with the previous tax design applied in 2006. In order to identify possible anticipation and adaptation effects, the analysis covers the 2004-2010 period. This research employs microdata from the Spanish PIT Return Panel. Results reveal two effects of the reform on the HI working in opposite directions: while the partition of the taxable income into two bases (one is taxed at ˜at rate) increases the HI, the transformation of personal and family allowances into tax credits reduces it. The predominance of one effect over the other depends on the equivalence scale applied.

The Spanish income tax reform of 2015: analysis of the effects on poverty and redistribution using microsimulation tools

In this work we analyze the effects of the 2015 reform of the Spanish personal income tax (PIT) on tax revenue, liquidity, redistribution, progressivity, and poverty, using microdata. Tax reform has increased the redistributive effect. The applicable legislation in 2016 is almost 6.3% more redistributive than that in 2011, as measured by the Reynolds-Smolensky index. This is a remarkable achievement since greater redistribution has been attained through significantly lower tax revenue. The 2016 legislation has produced 4.4% lower tax revenue, but progressivity, as measured by Kakwani index, has increased by 12.2% from the 2011 legislation. The redistributive and progressivity analysis has been conducted with the use of microsimulation tools developed in the Instituto de Estudios Fiscales (IEF), in Spain. The poverty analysis is made using EUROMOD, a tax-benefit microsimulation model for the European Union.

The effects of separate taxation on labor participation of married couples. An empirical analysis using propensity score

Up to 1987 the Spanish Income Tax imposed compulsory joint filing for married couples. However, the 1988 reform allowed spouses to choose between joint and separate taxation, involving a reduction in tax rates for secondary earners. Our aim is to analyze this reform as a quasi-natural experiment, assessing the effects of tax changes on labor participation. To find out the causal effect we adopt the difference-in-differences technique. We use data from the ‘Spanish Income Tax Panel 1982–1998’. Our results show that, as a consequence of differential tax changes, married women in families more strongly affected by the fiscal reform increase their labor participation more than secondary earners from families less affected by the reform. The participation rate for secondary earners in the treatment group increases by 9.4 percentage points whereas the control group increases their participation rate by 7.8 percentage points. We define the treatment group as those secondary earners in relatively low-income families in year 1987 and the control group as those in middle-high income families, because the former experiences a stronger reduction in tax rates than the latter. As a result, we can attribute the 1.6-percentage-point-increase in participation rates to the 1988 income tax reform.

Taxation of capital gains and Lock-in effect in the Spanish Dual Income Tax

The aim of this paper is to study the possible change in the individual behaviour of the Spanish taxpayers about the willingness to declare capital gains, Lock-in effect, as a consequence of variations in the marginal rate. To do this, a two stages model is proposed to analyze which variables affect both the probability, and the amount, of capital gains declarations. The empirical analysis was performed using the Spanish annual personal income tax return sample from IEF-AEAT (Institute of Fiscal Studies and the Tax Department) for the periods 2006 and 2007, corresponding to the years before and after the reform that introduced a Dual Income Tax in Spain, with a flat tax rate for capital gains tax. The main results show that a 1% increase in the capital gains tax rate reduces the probability of declaring capital gains by around 7.51% (2006) and 8.19% (2007), and the amount of capital gains by around 3.91% (2006) and 5.79% (2007).

Bypassing Progressive Taxation: Fraud and Base Erosion in the Spanish Income Tax (1970-2001)

In this paper I estimate under-assessment of incomes in the Personal IncomeTax during the years following its introduction in Spain. The methodology combines an analysis of discrepancy with National Accounts and an econometric exercise, which follows and slightly modifies the Feldman and Slemrod (2007) procedure, based on the relation of reported charitable donations with the composition of income in tax micro-data.Both calculations show that concealment of income differed substantially across sources and levels, with better compliance at the bottom of the distribution of taxpayers. Because of this, fraud made the tax less progressive than it was on paper. Compliance improved over the next decades, but the overall levels were still far from those attained in developed countries, because of lack of administrative capacity or political will to enforce the new regulation. In this way,general, comprehensive income taxation was hardly a reality 20 years after its introduction. (Less)

Did Housing Taxation Contribute to Increase Riskier Borrowing?

This paper estimates, using a simultaneous equation model, the determinants of mortgage, including as a variable the tax saving due to the treatment of mortgage payments in Spanish income tax. We use an unusually rich data set obtained from a housing market intermediary with franchisers throughout the majority of the Spanish provinces. We observe that the income tax credit increased riskier borrowing during the housing boom years. Increasing by one percentage point the ratio of the present value of the stream of explicit tax savings to the price of the property, the mortgage amount granted increases by 1.6 %, whereas it causes a 2 % decrease in the term. This in turn, implies that the time discount factor increased in our sample by about 0.7–1.1 percentage points causing individuals to borrow riskier amounts of mortgage for shorter terms. This observation has important policy implications for governments wishing to foster real estate markets growth.

Inference tests for tax progressivity and income redistribution: the Suits approach

The Suits index is often used in tax policy analysis to measure progressivity and to detect changes in progressivity over time and between different fiscal policies. The lack of attention that has been devoted to the inference issue to date is surprising. In this paper, the limiting distribution of the Suits index estimator is derived and simple plug-in formulae for the index estimator and its sampling variance are provided. By means of a simulation analysis, we show that inferences based on first-order asymptotics perform well for moderately large samples. Bootstrap-t – which uses the plug-in variance estimator – appears to perform well. The accuracy of the proposed inference tests is also illustrated by means of an empirical application that uses Spanish income tax data.

Progresividad y redistribución por fuentes de renta en el IRPF dual

Progresividad y redistribución por fuentes de renta en el IRPF dual

A Theoretical and Practical Study on Linear Reforms of Dual Taxes

We extend the linear reforms introduced by Pf¨ahler (1984) to the case of dual taxes. We study the relative effect that linear dual tax cuts have on the inequality of income distribution -a symmetrical study can be made for dual linear tax hikes-. We also introduce measures of the degree of progressivity for dual taxes and show that they can be connected to the Lorenz dominance criterion. Additionally, we study the tax liability elasticity of each of the reforms proposed. Finally, by means of a microsimulation model and a considerably large data set of taxpayers drawn from 2004 Spanish Income Tax Return population, 1) we compare different yield-equivalent tax cuts applied to the Spanish dual income tax and 2) we investigate how much income redistribution the dual tax reform (Act ‘35/2006’) introduced with respect to the previous tax.

Targeting fertility and female participation through the income tax

We evaluate the effect of a 2003 reform in the Spanish income tax on fertility and the employment of mothers with small children. The reform introduced a tax credit for working mothers with children under the age of three, while also increasing child deductions for all households with children. Theoretically, given the interplay of these two components, the expected effect of the reform is ambiguous on both outcomes. We find that the combined reforms significantly increased both fertility (by almost 5%) and the employment rate of mothers with children under three (by 2%). These effects were more pronounced among less-educated women. In addition, to disentangle the impact of the two reform components, we use an earlier reform that increased child deductions in 1999. We find that the child deductions affect mothers' employment negatively, which implies that the 2003 tax credit would have increased employment even more (up to 5%) in the absence of the change in child deductions.

Targeting Fertility and Female Participation Through the Income Tax

We evaluate the effect of a 2003 reform in the Spanish income tax on fertility and the employment of mothers with small children. The reform introduced a tax credit for working mothers with children under the age of three, while also increasing child deductions for all households with children. Theoretically, given the interplay of these two components, the expected effect of the reform is ambiguous on both outcomes. We find that the combined reforms significantly increased both fertility (by almost five percent) and the employment rate of mothers with children under three (by two percent). These effects were more pronounced among less-educated women. In addition, to disentangle the impact of the two reform components, we use an earlier reform that increased child deductions in 1999. We find that the child deductions affect mothers' employment negatively, which implies that the 2003 tax credit would have increased employment even more (up to five percent) in the absence of the change in child deductions.

Inequality Effects of Inflation: The 'Bracket Creep' Effect in the Spanish Income Tax System

The aim of this research is to analyse how inflation induced erosions of the nominally defined items of the tax rules of the Spanish income tax system may change distributional and revenue generating properties of income taxes. We further investigate the effects of the tax reform carried out in 2003. Although the Spanish government claimed that this reform would reduce tax liabilities, this is not so clear as many argue that this reform only offset the effects of inflation suffered by the population since 1999. Using the European Community Household Panel (ECHP) data set we aim to shed some light on the above issues through microsimulation techniques. Furthermore, we will also measure the inequality effects caused by the fact that the Spanish tax system does not automatically adjust the main fiscal elements to account for inflation.

Discrete choice models of labour supply, behavioural microsimulation and the Spanish tax reforms

The aim of the present study is to show the potential of behavioural microsimulation models as powerful tools for the ex ante evaluation of public policies. We analyse the impact of recent Spanish income tax reforms upon efficiency and household and social welfare and study the effects of various (basic-income and vital-minimum) flat tax schemes. The analysis is performed using a microsimulation model in which labour supply is explicitly taken into account. Instead of following the traditional continuous approach (Hausman, Labour supply, Aaron and Pechman (eds.), How Taxes Affect Economic Behaviour, The Brooking Institution, Washington, DC, 1981; Econometrica, 53: 1255–1282, 1985; Taxes and labour supply, Auerbach and Feldstein, (eds.), Handbook of Public Economics, North-Holland, Amsterdam, vol. 1, 1979), we estimate the direct utility function employing the methodology proposed by Aaberge et al. (Scand. J. Econ., 97: 635–659, 1995) and Van Soest (J. Hum. Resour., 30: 63–88, 1995). We maintain population heterogeneity by applying a social welfare analysis to the complete sample, rather than merely focusing on the active population. The source of our data is a sample of Spanish individuals in the 1995 wave of the EC Household Panel. We find that the redistribution policies considered have only had a minor impact on economic efficiency but, by contrast, have significantly affected social welfare.

Personal Income Tax Decentralization, Inequality, and Social Welfare

This article elaborates and evaluates a model for the decentralization of a personal income tax that is consistent with the optimal redistribution model. In this study’s model, the regions have individualistic, symmetrical, additively separable, and inequality-averse social welfare functions. Each region applies to its constituents a progressive personal income tax, which measures individuals’ ability to pay with sole regard to their income. The central government has a social welfare function, and its tax-raising power is limited to the establishment of a surcharge (or deduction) proportional to the income of individuals net of the respective regional taxes. This article presents the conditions that permit this model of fiscal decentralization to be recommended as a result of the reduction of inequality and the increase in welfare in each region and in the country as a whole. The theoretical results are applied to the Spanish income tax by the performance of various microsimulation exercises.

Simplifying the personal income tax system: lessons from the 1998 Spanish reform

AbstractGovernments often try to reduce the complexity of personal income tax systems by decreasing the number of tax filings. The 1998 reform of the Spanish income tax system has followed this approach by adjusting withholding on earned income to the income tax liability. In this paper, we assess to what extent the reform has fulfilled its purposes, making use of a micro‐simulation tax‐benefit model for Spain, ESPASIM. The number of individuals exempt from filing a tax return has been reduced to around half of the total number of taxpayers. However, the quantity of tax returns sent to the tax administration has not changed so much because the new withholding system adjusts taxes for only 29 per cent of those exempt. Moreover, the new system increases the overall excess of tax withholding by 1.5 billion euro. We also study alternative reforms that could achieve better results than the one implemented.