Reforming the Individual Income Tax in Spain

39 Pages Posted: 28 May 2020

See all articles by Nezih Guner

Nezih Guner

Centre for Monetary and Financial Studies (CEMFI)

Javier Lopez-Segovia

Centre for Monetary and Financial Studies (CEMFI)

Roberto Ramos

Banco de España

Multiple version iconThere are 2 versions of this paper

Date Written: May 2020

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 effective 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%.

Keywords: Labor Supply, Laffer Curve, progressivity, taxation, Top Earners

JEL Classification: E21, E6, H2, J2

Suggested Citation

Guner, Nezih and Lopez-Segovia, Javier and Ramos, Roberto, Reforming the Individual Income Tax in Spain (May 2020). CEPR Discussion Paper No. DP14779, Available at SSRN: https://ssrn.com/abstract=3612848

Nezih Guner (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain

Javier Lopez-Segovia

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain

Roberto Ramos

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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