The tax pressures that the lowest earners in Spain face are virtually similar to those that hit the country’s richest. In relation to their wealth and together with the main figures of the Spanish tax system, the lowest income deciles are subject to an average tax rate of 28%, while the highest decile in the table bears a slightly lower tax rate of around 27%.
In turn, if the most privileged 1% of the population is divided into three parts, 0.9% and 0.09% pay a rate of 26%, while the remaining 0.01% pay another 28%. In short, the numbers are practically similar. “These data show us how the overall Spanish tax system has become less progressive over the years,” explains Clara Martínez-Toledano, researcher at EsadeEcPol and responsible for the report. Income inequality and redistribution in Spainpublished this week by the think tank from trade school.
First of all, it is worth remembering that the analysis of the document starts from the third income decile, since the first two groups can distort the picture by including older people who do not yet have any real estate or employment income. “Assigning taxes to these deciles, which are mostly composed of young people in their 20s who are not yet employed or have no assets, the wrong conclusions are drawn,” explains Martínez-Toledano.
Once this point is clarified, the document analyzes the evolution of the tax burden in Spain over two decades, from 1999 to 2019. In 2003, for example, the average rate paid by the third decile (the lowest trough for this analysis) was 28 %, slightly below what the richest were paying. Four years later, in 2007, the most common rate for low earners was 26%, while the richest 1% was subject to a rate of 40%, 14 percentage points higher. However, in 2019, the latest year with available data, the tax burden is practically homogeneous across the income distribution.
According to Martínez-Toledano, this loss of progressiveness can be explained by the evolution of the main tax figures and the changes in their construction that have been made since then.
Looking at the weights of the different income deciles, the income tax (IRPF) is the only figure that can retain its progressive character. The population falling in the bottom decile of the analysis pays an average rate of 1%, increasing as income increases, up to 13% paid by the bottom decile. In contrast, the richest 0.9% are subject to a 15% tax rate, 0.09% to a 12% tax rate and 0.01% to a 9% tax rate. For all these reasons, in the general X-ray that draws the tax, “you can see the weight of the tax increasing as income increases,” the researcher explains.
The EsadeEcPol report distributes all national income and taxes to households. Corporate tax does fall on companies, “but companies belong to someone,” adds the expert. “We don’t have specific tax data, but we do have the dividends collected in the IRPF. We allocate these dividends to corporate income tax.”
With this method it is possible to extract the weight that companies have in each income bracket and the conclusion is clear. From the 10th to the 80th income decile, the tax rate is 0%. The tax burden begins to increase from the 90th decile to a maximum rate of 14% for the richest 0.01% of the population.
Another possible reading of this dance of numbers, Martínez-Toledano recalls, is that if the weight of corporations were subtracted from the total tax burden, the tax rate on the highest income groups would be about half that applied to lower-income groups .
Excise and other taxes on goods, notably VAT, also serve to show the lack of progressiveness of the income-based system. In 2019, for example, the population with the lowest incomes was subject to a tax rate of around 25%, while in the upper part of the table the burden was well below 10%. In particular, the richest 0.01% applied a rate of just 3%. “Although taxpayers with higher incomes tend to consume more and more expensive products, in the end the entire population has to consume. Because of this, and always in relation to income, you can see lower income groups suffer a much higher average tax rate.”
According to Martínez-Toledano, the tax burden on real estate income seems to be the most homogeneous of the entire income distribution and ranges between 1% and 2% in all analyzed groups. However, this has two nuances. On the one hand there is the Real Estate Tax (IBI), which affects all groups analyzed in proportion to the weight that home ownership has in Spain. On the other hand, the tax credits enjoyed by wealthy individuals have an impact. It doesn’t seem reasonable, he adds, that the highest incomes (0.01%) are only taxed at 1%. “This is explained by the tax exemptions and deductions that these incomes can benefit from, as well as tax competition between autonomous communities, which encourages the movement of large assets between some regions and others.”
The report highlights that the 1% of the population earning the most in Spain accumulated 17% of national income in 2019, a gap that has grown by four points since the financial crisis erupted in 2008, since the wealthiest a year earlier, the national wealth was 13%. For the richest 1%, labor income made up less than 35% of their income, while the weight for the rest of the population ranged from 65% to 85%. In contrast, the wealthiest received more capital income than the lower-income groups.