Spanish dual income tax and 2) we investigate how much income redistribution the dual
tax reform (Act ‘35/2006’) introduced with respect to the previous tax.
Keywords: Dual taxes, linear reforms, Lorenz domination, lattices
1 Introduction
In the last decades, there have been trends to reform tax systems in OECD countries. One
of the implicit goals of tax reforms has been the reduction of the individual tax burden as
a policy measure to boost economy and to promote incentives. In this context, Personal
Income Tax reforms have had a prominent role in the political agenda.
In the case of the Spanish Income Tax, three reforms have been applied since 1998. The
latest one introduced the Dual Income Tax (Act 35/2006). Tax cuts have been embedded
within more general policy measures related to the efficiency and equity aspects of the tax. In
particular, progressivity and redistributive consequences of such reforms have been relevant
policy issues to be considered. The evaluation of the impact of such reforms on income
distribution and individual welfare is basically a matter of empirical assessment.
If policy makers’ primary concern is to reduce (or increase) tax liability so that charac-
teristics of the tax such as progressivity, redistribution, elasticity are preserved after reform,
Pfahler’s analysis of linear tax reforms applied to a unidimensional tax would be very useful
for its simplicity and normative results1.
Pfahler (1984) considers neutral-revenue tax reforms that reduce (or increa-
se) tax liability. According to his results, tax cuts maintaining residual progression un-
changed are the most redistributive reforms. Additionally, whenever the income distribution
is positively skewed and the tax function is progressive such cuts are also the most welfare-
improving reforms. Furthermore, this option would be chosen in a majority vote process for
income distributions with more ’poor’ than ’rich’ tax-payers, in a way that will be shown
1 A tax reform is named ’linear’ if the post-reform average tax rate is obtained as a linear transformation
of the initial average tax rate.