The removal of tax expenditures from Spanish personal income tax: Impact on tax collection and income distribution

The paper estimates the consequences for tax revenue and income distribution of the removal of the tax expenditures from Spanish Personal Income Tax (IRPF) in place during the 2013 tax year. The paper concludes that the removal of all the tax expenditures analyzed would increase revenue by euro24,457 million (37.9% of the IRPF actual collection), and that the redistributive effect, measured by the Reynolds-Smolensky index, would be reduced by 1.1%. The paper also analyzes sundry hypothetical scenarios involving the refunding to individuals of the tax collected through the removal of tax expenditures, and its distributive impact is quantified. Applications For Practice As in other countries, Spanish personal income tax (IRPF) is fraught with tax expenditures, in the form of exemptions, deductions, allowances, special rates, tax credits, and so forth, the effects of which-in terms of effectivity, efficiency, and equity-are highly debated. The removal of most of these tax expenditures would result in a 37.9% increase in IRPF revenue in 2013 ((sic)24,457 million), and a slight reduction of 1.1% in its redistributive effect, as measured by the Reynolds-Smolensky index. It is possible to design tax or expenditure policies that compensate individuals for the increase in their tax liability resulting from the removal of tax expenditures, while maintaining or improving the redistributive effect of IRPF and reducing its efficiency costs. The implementation of an Earned Income Tax Credit in IRPF, financed by the removal of all tax expenditures, would have a highly progressive effect, and increases by about 70% of the redistributive effect of IRPF, before and after the elimination of tax expenditures.