Optimal Progressivity of Personal Income Tax: A General Equilibrium Evaluation for Spain

59 Pages Posted: 22 Jan 2021

Date Written: January 20, 2021

Abstract

Is the Spanish economy positioned at its optimal progressivity level in personal income tax? This article quantifies the aggregate, distributional, and welfare consequences of moving towards such an optimal level. A heterogeneous households general equilibrium model featuring both life cycle and dynastic elements is calibrated to replicate some characteristics of the Spanish economy and used to evaluate potential reforms of the tax system. The findings suggest that increasing progressivity would be optimal, even though it would involve an efficiency loss. The optimal reform of the tax schedule would reduce wealth and income inequality at the cost of negative effects on capital, labor, and output. Finally, these theoretical results are evaluated using tax micro data and describe a current scenario where the income-top households typically face suboptimal effective average tax rates.

Keywords: income tax, progressivity, inequality, income and wealth distribution, general equilibrium, heterogeneous agents

JEL Classification: D31, C68, E62, H21

Suggested Citation

Serrano-Puente, Dario, Optimal Progressivity of Personal Income Tax: A General Equilibrium Evaluation for Spain (January 20, 2021). Banco de Espana Working Paper No. 2101, Available at SSRN: https://ssrn.com/abstract=3770089 or http://dx.doi.org/10.2139/ssrn.3770089

Dario Serrano-Puente (Contact Author)

UB School of Economics ( email )

c/ John M. Keynes, 1-11
Barcelona, 08034
Spain

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