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Optimal progressivity of personal income tax: a general equilibrium evaluation for Spain

Darío Serrano-Puente ()

No 2101, Working Papers from Banco de España, Working Papers Homepage

Abstract: Is the Spanish economy positioned at its optimal progressivity level in personal income tax? This article quantifies the aggregate, distributional, and welfare consequences of moving towards such an optimal level. A heterogeneous households general equilibrium model featuring both life cycle and dynastic elements is calibrated to replicate some characteristics of the Spanish economy and used to evaluate potential reforms of the tax system. The findings suggest that increasing progressivity would be optimal, even though it would involve an efficiency loss. The optimal reform of the tax schedule would reduce wealth and income inequality at the cost of negative effects on capital, labor, and output. Finally, these theoretical results are evaluated using tax micro data and describe a current scenario where the income-top households typically face suboptimal effective average tax rates.

Keywords: income tax; progressivity; inequality; income and wealth distribution; general equilibrium; heterogeneous agents (search for similar items in EconPapers)
JEL-codes: D31 C68 E62 H21 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2021-01
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
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https://www.bde.es/f/webbde/SES/Secciones/Publicac ... 21/Files/dt2101e.pdf First version, January 2021 (application/pdf)

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Journal Article: Optimal progressivity of personal income tax: a general equilibrium evaluation for Spain (2020) Downloads
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