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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.

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