Allowances: Are Really Better than Tax Credits?

Nuria Badenes-Plá, Julio López-Laborda and Jorge Onrubia

Brazilian Electronic Journal of Economics, 2001, vol. 4, issue 1

Abstract: In this paper we develop an analytical framework devoted to compare family size related tax credits and allowances. As a main result, we obtain that, in a social welfare context à la Atkinson and Bourguignon (1987), if tax credits and allowances are compared in an individual context, it could be assured that a progressive income tax with family size related tax allowances is never welfare superior to an equal-yield income tax involving tax credits. Theoretical results are checked on empirical grounds for the Spanish personal income tax (IRPF) in force in 1999. We develop a micro-simulation exercise, using the Panel of IRPF Returns, which belongs to the Institute of Fiscal Studies. Two results can be derived from this exercise. Firstly, that, both adopting an individual or household approach, allowances and tax credits are welfare superior to an equal-yield proportional tax. And secondly, that, although a tax credit system reduces global income inequality more than what allowances does, also from an individual or household approach, it is not possible to determine superiority in welfare terms of a system over the other.

Keywords: Personal Income Tax; Inequality; Social Welfare; Family Size; Tax Credit; Allowances (search for similar items in EconPapers)
Date: 2001
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