Evaluating Macroeconomic And Distributional Impacts Of Current And Alternative Tax Reforms In Spain: An Applied General Equilibrium Approach

Introduction: The Context of the Analysis In order to meet the stability requirements of European authorities and recover the credibility of public accounts, several tax reforms were implemented in the Spanish economy since 2010 till 2016. These tax reforms affected both direct i.e. the personal income tax and indirect taxes i.e. the value-added tax. The principal objective of the tax reform packages was to reduce the public deficit due to the fiscal consolidation pressures. Consequently, the derived potential distributional effects of these tax reforms constituted a ‘secondary issue’. Recent measures such as the tax reform of personal income taxes that came into force the first of January 2016 have probably shifted the policy priorities. The deterioration of the income distribution as a result of the deep economic crisis experimented in the Spanish economy (2007-2014) may explain the change in the policy focus. In great contrast to other developed economies, especially during the 80s, Spain did not follow the trend of increasing income distribution disparities (OECD, 2008, 2011). Nevertheless, as a result of the virulence of the current economic crisis, Spain has been one of the countries where income inequalities have risen the most i.e. the Gini coefficient increased 4 percentage points from 2007-2011 (OECD, 2013, 2014). Covering a broader period of analysis (2007-2012) and using different income distribution indicators such as the S80/S20 ratio (Goerlich and Villar, 2009), alternative analyses show that the income of the wealthiest 20% of the population moved from 5.7 to 7.3 times higher (on average) than the income of the 20% least wealthy in the Spanish economy (BBVA-Ivie, 2014). All these stylized facts points out the urgent need for both monitoring and implementing appropriate and effective tax reforms in Spain particularly oriented to reduce income disparities. Improving income distribution constitutes a ‘moral obligation’ for all governments and institutions. Furthermore, this is very important in the context of the Spanish economy since greater income equality may increase GDP per capita up to 5 % (Cingano, 2014). Consequently, having sound empirical estimates of the potential macroeconomic and distributional impacts of the current tax reforms and the alternative proposals is crucial for the present context of the Spanish economy. Objective and Main Contributions of the Analysis: Using a static CGE model, the present study evaluates the potential macroeconomic effects i.e. impacts on GDP, public deficit, price levels, labor and capital income and aggregate unemployment rate as well as the distributional effects i.e. Effective indicators (Gini Index) and Structural measures (at a particular household income level) of the degree of progressivity of the undertaken and proposed tax reforms in the Spanish economy.To the best of our knowledge, this has not been addressed by previous analyses, not at least for the context of the Spanish economy. As mentioned before, we use a static CGE model in order to address the objectives of our analysis: to explore the degree of progressivity of current and alternative Tax policies in the context of the Spanish economy. Not without limitations, as any methodology, the CGE approach presents the advantage of computing simultaneously the degree of efficiency (macroeconomic indicators) and distributional effects (microeconomic indicators) of actual and alternative tax reforms. Therefore, the CGE methodology controls for the existing interdependencies between these two types of policy impacts. With the objective of fulfilling adequately the purposes of our analysis, we have constructed a novel data set that consists in a Social Accounting Matrix for the period of 2010 for the Spanish economy (SAM_10Spain). The SAM_10Spain includes ten types of households according to its particular income level. Furthermore, disaggregated information about the contribution of each income source in each household income level is also provided. In fact, this disaggregation constitutes another contribution of our approach since it provides more comprehensive information on the degree of structural progressivity of each tax reform. Expected Results: Firstly, employing the aforementioned efficiency and distributional indicators, in our study we evaluate the degree of efficiency and income equality reached by the Tax Reforms implemented in Spain since 2012 ( Current Tax Reforms): • The Fiscal Reform that affected the value-added tax (in force since September 2012): the reduced increased 2 points (from 8% to 10%) and the general one increased 3 points (from 18% to 21%), respectively. • The Fiscal Reform that affected the Personal Income Tax (in force since January 2015): the tax brackets in the general tax base were reduced from seven to five and the maximum and minimum tax rates were reduced i.e. the maximum tax rates moved from 52% to 46% while the minimum form 24.75% to 19,5%. Meanwhile, in the savings tax rates, the schedule was amplified from two (19% and 21%) to three brackets, with marginal taxes increased in each of them: 21%, 25% and 27%. • The Fiscal Reform that affected the Personal Income Tax (in force since January 2016): the maximum and minimum tax rates in the general tax base were further reduced (to 45% and 19%, respectively) as well as the marginal ones corresponding to the savings tax base (19.5%, 21.5% and 23.5%, respectively). The evaluation of these Tax Reforms is conducted in a sequential way in order to isolate the derived impacts of each of these three Tax measures. Secondly, we evaluate the main tax proposals suggested by one of the Spanish emerging political parties, called “Ciudadanos”, which consists on the following tax measures. • To reduce from three to two the value-added taxes rates in the following way: a general tax rate fixed at 18% (as opposed to the current valued, 21%) and a reduced tax rate fixed at 7% (this reduces tax rate would include those good and services to which the current over-reduced tax rate is applied, fixed at 4%) • To reduce to three the number of income brackets in the personal income taxation (applying the following tax rates: 18%, 28% and 42%, respectively). This proposal is complemented by including a bonus for the lowest incomes as well as a bonus for the retired people (pensions). Thirdly, we compared the economy-wide impacts of actual Tax Reforms with those that would have been achieved if other policy alternatives would had being implemented i.e. A Reform in the Personal Income Tax that introduces a flat tax rate while approximating nontaxable income to necessary consumption (Faíña et al. 2013). At least from a theoretical point of view, this policy alternative has been considered to be superior in terms of progressivity and social welfare than the actual structure of the Personal Income Tax; something that is in line with the present policy focus of the Spanish government.