taxpayers with annual income between 15,000 and 20,000 euros are the most affected by inflation and personal income tax reforms. A span jump in this group assumes that “of every euro that they earn above 15,000, a very high percentage goes to personal income tax“and their real purchasing power is also diminished by the rise in prices, according to a study carried out for EsadEcPol by the director of the tax forum of this institution and inspector of the Treasury, Francis of the Tower; and carlos victoriafrom the Complutense University of Madrid. The solution they propose is a deduction in this section equivalent to the difference between the income withholding and the fee that would correspond to each taxpayer.
At the same time that they denounce that, at these levels, for equal income some taxpayers are not obliged to pay taxes and others are in case of having more than one payer, they explain that The Treasury would have benefited by about 9,000 million by not adapting the personal income tax rate to inflationalthough they admit that fully adjusting it to the rise in prices would have been very costly.
De la Torre denounces the situation of these incomes when there is more than one payer – a situation in which in 2020 there were some 1.4 million taxpayers. For example, a taxpayer who earns 15,000 euros, who is not withheld, normally has no obligation to file a return (with a single payer, the obligation to declare is from 22,000 euros). Thus, his final taxation is zero. However, if he had two payers, and they both paid him more than 1,500 euros, then he would have to file a statement. And by not having retained him in these cases he would have to pay 387.22 euros.
design flaw
The study explains that the progressivity of the tax through the marginal rate has a flaw in its design that gives rise to “erratic” behavior: “it goes from 0% to 15,000 euros to increase by 43 points at low income levels (the rate of the highest incomes), to later be reduced again in middle incomes”. An example: if a taxpayer with a tax base (the amount subject to tax) of 15,000 euros is increased in salary by 1,500 euros (10%), with the current system they would withhold 645 euros (marginal rate of 43%). On the other hand, one who earns 26,000, with an increase also of 10%, would only pay a marginal rate on that extra income of approximately 30%.
In a context of high inflation, these taxpayers they will hardly see their real purchasing power updated because most of the rises would be affected by the high marginal rate. In the example of 15,000 euros with a 10% salary increase, with average inflation of 8.4% like the one registered last year, “going from 15,000 net euros to 15,855 would not cover what is necessary to maintain purchasing power ( which would be 16,260 euros)”, affirm De la Torre and Victoria.
Distortions in personal income tax
The Government announced in September the increase in the minimum income tax exemption from 14,000 to 15,000 euros per year. The recent personal income tax reform of 2022, activated in 2023, joins the one approved in 2018 to reduce taxation for the lowest-income group. Both reforms have consolidated two different rates for filers and non-filers. This, despite being generally an advantage, generates distortions and unfair situations in personal income tax, as well as preventing the universalization of the declaration, which would make it easier to have censuses for, for example, beneficiaries of the minimum vital income (IMV), says De la Torre. And from this it follows that by overcoming that barrier heThe lower-middle incomes are the ones that support the highest step due to the jump in the IRPF section. It is a rise that, in the current context of high inflation, does not imply a proportional increase in real purchasing power.
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“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 study warns. Income tax collection, which already exceeded 80,000 million euros in 2021, breaks records. “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,” they add.
The authors admit that correcting and adapting the entire personal income tax to inflation, as claimed by some political forces, it has a very important cost. By 2022 would mean giving up raising about 9,000 million euros, which is almost one point of GDP more than the deficit. And the second issue is that this amount of lower collection supposes, by definition, greater spending capacity for households, which feeds inflation. In any case, De la Torre defends that the rate It could have been adapted to the average that wages rose, between 2% and 2.5%.