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The individual Laffer curve: evidence from the Spanish income tax

Ana Gamarra (), José Félix Sanz-Sanz () and María Arrazola
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Ana Gamarra: Melbourne Institute: Applied Economic & Social Research, The University of Melbourne, https://findanexpert.unimelb.edu.au/profile/870323-ana-gamarra-rondinel
José Félix Sanz-Sanz: Facultad de Ciencias Económicas y Empresariales, Universidad Complutense de Madrid and ICAE

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: This paper characterises the Laffer curve of each individual taxpayer in a schedular multirate income tax with income shifting. Analytical expressions for the revenue-maximising tax rate and the revenue-maximising elasticity are provided for the individual taxpayer and the aggregate population, as well as new estimates of the Elasticity of Taxable Income (ETI). Applying these to the Spanish income tax demonstrates that 49.46% (58.49%) of the taxpaying population in the non-savings tax base (savings tax base) is on the "prohibitive" side ("normal" side) of the Laffer curve. On average, these taxpayers are 6.59 points (24.73 points) above (below) the maximum of the Laffer curve. The fraction of total tax revenue lost through behavioural responses amounts to 53.77%. However, this fraction varies by population subgroup and decreases when we account for income-shifting responses, suggesting the presence of fiscal externalities in the Spanish PIT.

Keywords: personal income tax; Laffer curve; tax revenue; elasticity of taxable income (search for similar items in EconPapers)
JEL-codes: H21 H24 H26 H31 (search for similar items in EconPapers)
Pages: 30pp
Date: 2023-04
New Economics Papers: this item is included in nep-pbe and nep-pub
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