Government budget forecasts, the impact of this reform was estimated as a 6% reduction
on aggregate tax revenue. Considering this, we analyze how much income redistribution the
dual tax introduced regarding the previous tax and, consequently, who the gainers and the
losers from this reform are, if any. To do so we apply a residual-progressive linear tax cut
on the previous tax to reach the same revenue of the dual tax reform. Then a differential
redistribution analysis is carried out by comparing the two tax burden distributions.
For both applications results are computed for the whole range of the income distribution
and locally for pre-tax income deciles. Before showing the results of these two applications
we shall briefly describe the main features of the Spanish Income Tax and the SIMESP
micro-simulation model we use.
5.1 Description of the current Spanish Income Tax (2007) Act ‘35/2006’
The most important feature of the current Spanish Personal Income Tax (PIT) is its dual
structure. On one hand, ‘labor’ income base includes salary, entrepreneur and professional
income, pension plan and rental income. This income base is rated according to a four-
bracket tax schedule, ranging from 24% to 43% as the highest marginal tax rate. On the
other hand, capital income and realized capital gains constitute what is called the ‘savings’
base -or ’capital’ income base- which is levied at 18% fixed rate, with a 1500 e deduction for
dividends.
Standard income deductions to be applied on general base are salary-related expenses,
social security contributions and the amount invested in pension plans. Furthermore, there
is a progressive allowance on earned income. In order to get taxable income, losses on earned
and capital incomes can only be offset within their own base. Other allowances are related
to the demography of the family: personal allowance for each tax payer (plus an addition
allowance according to age), dependent children and ascendants. Further, these allowances
are augmented in the case of disabled members. Labor income-tax schedule is applied to the
total allowances, which deduces the gross-tax liability of PIT.
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