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theoretical predictions about the effect of linear dual tax cuts on income redistribution are
derived by using taxable income as the income variable of the analysis. Our simulations
are also based on the taxable-income variable, but their effects on income distribution are
measured as well considering the recipient pre-tax income. Pre-tax income is a more accurate
measure of the individual welfare than taxable income. The use of pre-tax income takes into
account the impact of allowances and deductions on PIT.

5.3 Comparing linear dual-tax cuts

In this exercise we compare three different linear tax cuts, T1,1 , T2,2 and T3,3, according to
the neutral revenue hypothesis. Table 1 describes ‘labor’ and ‘capital’ tax schedules for the
current Spanish Income Tax -which is the baseline of the simulation - and the proposed
linear tax cuts after applying a 10% reduction on both labor and capital gross-tax liabilities.

Tax schedule

Baseline

T1,1           T2,2            T3,3

Tax

Labor’ base

Tax Schedule

0-17, 360e

24%

21, 60%

21, 25%

21, 34%

17, 360 - 32, 360e

28%

25, 20%

25, 40%

25, 34%

32, 360 - 53, 360e

37%

33, 30%

34, 72%

34, 34%

> 53, 360e

43%

38, 70%

40, 94%

40, 34%

Parameter

gL = 26.56%

aL = 10%

bL = 3.61%

cl = 2.65%

’Savings’ base

18%

16, 20%

16, 29%

16, 27%

Tax Schedule

Parameter

gK = 17.28%

aK = 10%

bK = 2.08%

cκ = 1.72%

Table 1. Baseline tax and simulated tax reforms.

20



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