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The individual Laffer curve: evidence from the Spanish income tax

Author

Listed:
  • Ana Gamarra Rondinel

    (The University of Melbourne
    ARC Centre of Excellence for Children and Families Over the Life Course)

  • José Félix Sanz-Sanz

    (Universidad Complutense de Madrid
    Instituto Complutense Análisis Económico (ICAE))

  • María Arrazola

    (Universidad Rey Juan Carlos)

Abstract

This paper characterises the Laffer curve of each individual taxpayer in a schedular multi-rate 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. Applying these to the Spanish income tax demonstrates that 44.72% (58.49%) of the taxpaying population in the non-savings tax base (savings tax base) is on the “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.

Suggested Citation

  • Ana Gamarra Rondinel & José Félix Sanz-Sanz & María Arrazola, 2024. "The individual Laffer curve: evidence from the Spanish income tax," Empirical Economics, Springer, vol. 67(6), pages 2719-2769, December.
    • Handle: RePEc:spr:empeco:v:67:y:2024:i:6:d:10.1007_s00181-024-02618-8
    DOI: 10.1007/s00181-024-02618-8
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    References listed on IDEAS

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    More about this item

    Keywords

    Personal income tax; Laffer curve; Tax revenue; Elasticity of Taxable Income;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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