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income bracket limits are not exclusively an inflation update but they are also related
to the fact that allowances linked to the sociodemographic characteristics of the family
are applied after gross-tax liability is obtained. Specifically, this allowance is obtained
after applying the general tax schedule to the total amount of family deductions. The
main goal of the above changes is to introduce greater progressivity on the tax burden
distribution.

New taxation on capital income.

In the case of the dual tax, capital income is levied at an 18% fixed rate with a 1,500e
allowance for dividends. In contrast, capital income - including capital gains realized
within the year - before the reform was taxed according to the individual’s marginal
tax rate, t
(except long term realized capital gains which were also taxed at 15% fixed
rate). This is indeed the most notable aspect of the reform. If we consider income from
interest, dividends, etc as a surplus added to the earned income in the case of most tax
payers, the new tax clearly favors those taxpayers with a previous marginal tax rate on
regular income higher than 18%. However, the previous tax allowed for 40% deduction
on taxable capital income for long-run savings, so an extra euro on this type of income
was marginally taxed at 0,6t
'. Furthermore, there was a 40% tax credit for dividends.

Other features.

Another important difference between the two taxes, in our opinion, is that the way
of compensating different types of incomes has been canceled out by the reform. Any
negative yields on capital income were integrated into the income base before the reform,
whereas currently these should be offset exclusively on the capital income base belonging
to further fiscal years.

To compare both taxes under the equal-revenue hypothesis and focusing on the main
changes discussed above, some elements of the tax law before and after reform have been

27



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