Inflation and the latest tax reforms have raised the tax burden on low and medium incomes. This is stated in a report published this Tuesday by the EsadeEcPol Center for Economic Policies, which points out the “erratic” behavior of the progressiveness of the Spanish tax system among less wealthy taxpayers obliged to pay taxes. According to the authors’ calculations, the jump in the bracket triggers the personal income tax rate that incomes bear between 15,000 and 20,000 euros per year , without the increase in prices having meant an increase in their real purchasing power for them.
The Government announced in September the increase in the minimum income tax exemption from 14,000 to 15,000 euros per year. By crossing this barrier, “of every euro earned over 15,000, a very high percentage goes to personal income tax” , according to the report prepared by Francisco de la Torre Díaz, Treasury inspector and director of the EsadeEcPol Tax Forum, and Carlos Victoria Lanzón, professor at the Complutense University of Madrid.
For example, a 10% increase on an annual salary of 15,000 euros means ceasing to be exempt from personal income tax and suddenly paying a marginal rate of 43%, since the current system would withhold 645 euros. “It goes from 0% to 15,000 euros to increase by 43 points at low-income levels, to later be reduced again at medium incomes,” says the study. In this way, lower-middle incomes are the ones that bear the highest step due to the jump in the personal income tax bracket by increasing the volume of income, an increase that, in the current context of high inflation, does not imply a proportional increase in power real purchasing power , due to higher prices.
“The real economic capacity of families is reducing with inflation, but, in parallel, the effective rates of withholding in personal income tax on pensions and salaries are increasing, which anticipates higher effective final rates,” the research acknowledges. In turn, inflation has triggered personal income tax collection, which in 2021 already exceeded 80,000 million euros. “In 2021, despite not having yet recovered the 2019 GDP level, its collection reached the maximum in the historical series, and, according to the 2022 data, it continues to grow ,” the document advances.
Obligation to declare
Likewise, the authors of the report denounce the situations of “injustice” caused by the fact that the declaration of income is not mandatory for income of less than 22,000 euros per year from a single payer. “The fact that the obligation to declare is only generalized to 22,000 euros and that, despite everything, the withholding applied by default is less than the tax that would result in filing a declaration creates important incentives not to declare,” says the document, which states that “several million taxpayers support withholdings lower than the personal income tax rate and have no obligation to declare” .
In this sense, he points out that the personal income tax reforms of 2022 and 2018, aimed at cushioning the impact of inflation on the taxation of lower incomes, have deepened the difference in rates between income with and without the obligation to declare. “Despite being generally an advantage for these taxpayers, it generates distortions, asymmetries and unfair situations in personal income tax ,” the report warns. To solve it, the authors propose to reduce through deductions the difference between the withholding by default and the type that would be paid when filing the tax return.
In the medium term, the study also proposes to update the effective personal income tax for lower-middle incomes that absorb disproportionate inflationary impacts and promote the extension of the income statement for all taxpayers. “With the universalization of the personal income tax declaration, it would be feasible to articulate a more effective and much less expensive social and income policy in administrative terms,” the researchers defend.