Full document

Abstract

We quantify the aggregate, distributional, and welfare consequences of setting an optimal progressivity level in the Spanish personal income tax scheme. For that purpose, we use a heterogeneous households general equilibrium model featuring both life cycle and dynastic elements which is calibrated to replicate some aggregate and distributional characteristics of the Spanish economy. The findings suggest that increasing progressivity would be optimal, even though it would involve an efficiency loss. The optimal reform of the tax schedule would reduce wealth and income inequality at the cost of negative effects on capital, labor, and output. The evaluation of these theoretical results with tax microdata describes a current scenario where the income-top households typically face suboptimal effective average tax rates.