DP14779 Reforming the Individual Income Tax in Spain

Author(s): Nezih Guner, Javier Lopez-Segovia, Roberto Ramos Magdaleno
Publication Date: May 2020
Keyword(s): Labor Supply, Laffer Curve, progressivity, taxation, Top Earners
JEL(s): E21, E6, H2, J2
Programme Areas: Public Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14779

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%.