Working Paper: CEPR ID: DP14779
Authors: Nezih Guner; Roberto Ramos; Javier Lopez Segovia
Abstract: We study how much revenue can be generated by more progressive personal income taxes in Spain. We build a life-cycle economy with uninsurable labor productivity risk and endogenous labor supply. Individuals face progressive taxes on labor and capital incomes and proportional taxes that capture social security, corporate income, and consumption taxes. An increase (decrease) in labor income taxes for individuals who earn more (less) than the mean labor income generates a small additional revenue. The revenue from labor income taxes is maximized at an effective marginal tax rate of 51.6% (38.9%) for the richest 1% (5%) of individuals, versus 46.3% (34.7%) in the benchmark economy. The additional revenue from labor income taxes is only 0.82% higher, while the total tax revenue declines by 1.55%. The total tax revenue is higher if marginal taxes are raised only for the top earners. The increase, however, must be substantial and cover a large segment of top earners. The new tax collection from a 3 percentage points increase on the top 1% is just 0.09%. A 10 percentage points increase on the top 10% of earners (those who earn more than e41,699) raises the total taxes by 2.81%.
Keywords: taxation; progressivity; top earners; labor supply; Laffer curve
JEL Codes: E21; E6; H2; J2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher tax progressivity (H29) | increased tax revenue (H29) |
| increased marginal tax rates on top earners (H31) | additional revenue from labor income taxes (J39) |
| increased marginal tax rates on top earners (H31) | total tax revenue (H20) |
| 10 percentage point increase on top 10% of earners (H31) | total tax increase (H29) |
| higher tax progressivity (H29) | adverse effects on economic output and labor supply (J20) |