Measuring the effectiveness of statutory tax rates as generators of revenue and progressivity

José Félix Sanz Sanz

No 2025-13, Working Papers from FEDEA

Abstract: This paper analyses the effectiveness of statutory marginal rates in generating revenue and (local) progressivity in personal income taxation. Utilising an analytical approach, we derive expressions for the elasticity of the average tax rate and its progression in response to changes in marginal tax rates. The analysis recognises the endogeneity between taxable income and marginal rates (behaviour) and is carried out for the individual taxpayer and the population aggregate. Regarding tax collection, we confirm a low elasticity of the average tax rate to marginal tax rates, individually and in the aggregate. Regarding progressivity, when the marginal rate of a given bracket increases, the progressivity of this specific bracket is heightened. However, it decreases the progressivity of the brackets above while leaving the progressivity in the brackets below unchanged. In other words, increasing the marginal tax rate in a given bracket is “backwards neutral” but “forward regressive”. Finally, to show the use of the analytical expressions derived, they are applied to a Spanish microdata set of tax returns.

Date: 2025-12
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