Bypassing progressive taxation: fraud and base erosion in the Spanish income tax (1970-2001)

In this paper I estimate under-assessment of incomes in the Personal Income Tax during the years following its introduction in Spain. The methodology combines an analysis of discrepancy with National Accounts and an econometric exercise, which follows and slightly modifies the Feldman and Slemrod (2007) procedure, based on the relation of reported charitable donations with the composition of income in tax micro-data. Both calculations show that concealment of income differed substantially across sources and levels, with better compliance at the bottom of the distribution of taxpayers. Because of this, fraud made the tax less progressive than it was on paper. Compliance improved over the next decades, but the overall levels were still far from those attained in developed countries, because of lack of administrative capacity or political will to enforce the new regulation. In this way, general, comprehensive income taxation was hardly a reality 20 years after its introduction

A fiscal revolution? Progressivity in the Spanish tax system, 1960-1990

The main objective of this paper is to calculate the distribution of the tax burden across income levels in Spain between 1960 and 1990. The chosen period covers the final years of Franco’s dictatorship and the first ones of the present parliamentary regime, and is thus meant to explore how political change was reflected on taxation. Does transition entail a fiscal revolution? Here is one case study developed and compared to other national experiences. Effective tax reform seems to have been politically blocked during the dictatorship, with public budgets growing fundamentally on the grounds of social security contributions. Democracy brought about a comprehensive transformation starting in 1977, which aimed at improving fairness (progressivity)and increasing revenue (to fund the development of the Welfare State). In this work I analyse whether the reforms entailed effective changes in the distribution of the tax burden, by imputing tax collection to taxpayers, based on income and consumption micro-data from Household Budget Surveys. The results show a persistent (albeit decreasing) regressivity in the tax system, which caused an increasingly negative redistribution of income. Pre-Tax incomes grew unequal during the period and net incomes even more so as a result: the tax reform did not fulfill its equalizing promises. The joint effect of the fiscal system, however, seems to have been slightly positive due to progressive social spending

Methodological Notes : for "Income Taxes and Redistribution in the Early Twentieth Century" and "Income Tax Progressivity and Inflation during the World Wars"

This document presents the methodological approach used in two papers about historical income taxes: “Income taxes and redistribution in the early twentieth century” (Torregrosa-Hetland and Sabaté, 2021) and “Income tax progressivity and inflation during the World Wars” (Torregrosa-Hetland and Sabaté, 2019). We first describe the general method and sources used to obtain synthetic distributions of income and calculate the effective income tax rates and the corresponding indices of progressivity and redistribution. Secondly, we discuss the most important country-specific issues that have been taken into account in our calculations. Finally, the third section looks at the accuracy of our synthetic income distributions and tax simulations by comparing them with the original series from the tax statistics. The two aforementioned papers summarize this same information in their methodological sections, but this note goes more in depth into some details that might be of interest to some readers

Income Taxes and Redistribution in the Early Twentieth Century

This paper studies the developments in the income taxes of Sweden, the United Kingdom, and the United States during the first half of the twentieth century. We present the evolution of marginal and average effective tax rates, number of taxpayers, and income tax due over the whole income distribution, and calculate the corresponding indices of progressivity and redistribution.Our results show that redistribution through the income tax increased during the period, but with varying intensity and mechanisms. During World War I this was a joint effect of increases in the amount of revenue collected (average effective tax rate) and progressivity, whereas during World War II revenue increased again but progressivity diminished, as the tax incorporated more low- and middle-income taxpayers. The income tax in the United Kingdom was always the most redistributive of the three, and after 1945 also the one that remained most progressive

Tax System and Redistribution: the Spanish Fiscal Transition (1960-1990)

La tesis analiza el sistema fiscal español entre los años 1960 y 1990, con especial atención a los aspectos de progresividad y redistribución, y a la evolución de la desigualdad en el periodo. Se estudian las reformas impositivas que tuvieron lugar durante la transición a la democracia, realizando una evaluación cuantitativa de sus efectos. Debido a la larga dictadura sufrida por el país entre 1936/39 y 1976, España mantuvo durante casi todo el siglo XX las formas fiscales tradicionales del sistema liberal decimonónico: los impuestos eran bajos, regresivos e ineficientes, y las raíces del estado del bienestar se mantuvieron subdesarrolladas. Con el retorno de la democracia, pronto se impulsó una reforma con los objetivos de hacer el sistema progresivo, eficiente y capaz de generar mayor recaudación, cuyas novedades principales fueron la introducción del impuesto sobre la renta (1979) y del IVA (1986). Pero durante las siguientes décadas, las cotizaciones sociales siguieron siendo la fuente principal de ingresos públicos, y la alta evasión fiscal se mantuvo como uno de los grandes problemas no resueltos. ¿Cuál fue el efecto neto de todo ello? La mayoría de la tesis es de carácter empírico, basándose en datos de Encuestas de Presupuestos Familiares y estadísticas de recaudación fiscal, que reciben un tratamiento crítico. Se realizan diversas propuestas metodológicas, para el ajuste por infra-declaración de los datos de encuesta y la estimación del fraude en base a declaraciones fiscales. Los resultados principales son una considerable persistencia en los niveles de desigualdad, el mantenimiento de la regresividad del sistema impositivo, y el fuerte impacto negativo del fraude en el impuesto sobre la renta. Los niveles de redistribución total del sistema de impuestos y transferencias alcanzados en España durante el periodo no alcanzaron la convergencia con los de otros países occidentales. Se concluye que las demandas de imposición progresiva se vieron constreñidas tanto por las instituciones políticas nacionales como por un nuevo contexto internacional, donde la combinación de bajo crecimiento, apertura económica y teoría neo-liberal hizo los impuestos progresivos más difíciles de defender e implementar. Ello, a su vez, limitó la capacidad redistributiva del presupuesto.This thesis analyses the Spanish tax system between 1960 and 1990, with special attention to the developments in progressivity, redistribution and inequality. It addresses the reforms that took place during the transition to democracy, providing a quantitative joint assessment which was missing in the literature. Because of the long dictatorship suffered by the country between 1936/39 and 1976, Spain was a laggard in abandoning the traditional liberal forms of taxation in favour of 20th century tax ideas. Taxes were low, regressive and inefficient during these decades, and the welfare state seeds were kept underdeveloped. During the sixties, public finance scholars envisaged the introduction of the 'European' model, but such a reform could not make it through under Francoism. As democracy returned, the new government soon passed several tax measures which meant to make the system progressive, efficient and able to raise higher revenue. This would bring the country into convergence with its European neighbours, allowing integration in the European Economic Community and the development of a modern welfare state. The main milestones were the introduction of a personal income tax (1979) and a value added tax (1986). But, during the following decades, social contributions kept being the single most important public revenue source, and high tax evasion persisted as one of the main unresolved problems signalled by experts. These elements sustain the initial hypothesis of a proportional or still regressive tax system after the reforms — which would contradict simple political economy models in the literature, were democratization redistributes political and economic power. Our guiding research questions thus are: Did the tax system become (more) progressive? Did it reduce income inequality in the country? And what was the evolution of tax evasion and its incidence on different income levels? The empirical work is mainly based on Household Budget Surveys, tax revenue data and statistics of tax burden distribution, which are critically treated and adjusted. Methodological innovations include a proposal for correction of biases in household survey data and an addition to Feldman and Slemrod (2007)'s method for estimating fraud in different income sources, by introducing a correction for sample selection. The calculations of the distribution of the tax burden underline the joint consideration of total taxation, including consumption taxes, which are often neglected in related work. The main results of the thesis are a considerable persistence in inequality levels (contrary to theoretical expectations and the conclusions of previous literature), the negative impact of taxation on the income distribution still after the reforms (while funding progressive social expenditure), and the severe and regressive incidence of tax evasion and base voidening in the personal income tax. The levels of tax-and-transfer redistribution attained in Spain throughout this period did not converge to those of other western countries. The author's interpretation concludes that demands for progressive taxation were constrained by both domestic political institutions –with a bias for representation of center-right interests–, and a new international political economy. The combination of sluggish growth, economic openness and neo-liberal theory made progressive taxes harder to defend and implement. This, in turn, limited the state’s redistributive capacity. To some extent, this story might also fit other countries in the European periphery, adding a new category to the international discussion on regressive taxation and welfare state development. Welfare state laggards initially resorted to similar strategies to those used earlier by the leaders. But lower revenue from personal taxes, higher levels of inequality, and slow growth impeded the establishment of highly redistributive tax-and-transfer systems

Sistema fiscal y redistribución: la transición fiscal española (1960-1990)

La tesis analiza el sistema fiscal español entre los años 1960 y 1990, con especial atención a sus efectos en la distribución de la renta. Se abordan las reformas que tuvieron lugar durante la transición a la democracia, aportando una evaluación cuantitativa consistente de los cambios. A causa de la larga dictadura sufrida por el país entre 1936/39 y 1976, España introdujo las ideas fiscales del siglo XX con considerable retraso respecto de sus vecinos, manteniendo largamente un sistema de impuestos bajos, regresivos e ineficientes. Con el retorno de la democracia, diversas leyes de reforma fiscal pretendieron hacer el sistema más progresivo y capaz de generar mayores ingresos públicos, para la financiación de un incipiente Estado del Bienestar. El principio de progresividad, sin embargo, tuvo una aplicación práctica limitada. Los cálculos de la tesis lo muestran así, estimando la distribución resultante de la carga fiscal, la persistencia en las desigualdades de renta, y el fuerte impacto del fraude en la imposición personal. La interpretación ofrecida se sitúa entre el legado de la dictadura en la configuración del régimen parlamentario y el nuevo contexto económico, que combinaba la ralentización del crecimiento con una mayor apertura y movilidad internacional del capital

Income tax progressivity and inflation during the world wars

This paper studies the impact of inflation on income taxes in Sweden, the UK, and the United States during the world wars. As tax reforms were rising top marginal rates and reducing exemption thresholds, extraordinary levels of inflation eroded the real value of exemptions, brackets, and deductions. The micro-simulation of actual and alternative scenarios shows that inflation made the tax less progressive, particularly in Sweden during World War I and the UK during World War II. Nevertheless, its redistributive effect increased due to the related growth in tax revenue. Inflation contributed to transform a 'class tax'' into a 'mass tax'

Income tax progressivity and war inflation during the two World Wars

Top marginal rates in income taxes increased significantly during the two World Wars in most Western countries, which points towards increases in their progressivity. We argue, however, that this war-related effect is less clear-cut than previously thought: wartime inflation could have exerted a counteracting impact by pushing citizens into higher tax brackets, including new individuals from the bottom of the income distribution into being taxpayers, and reducing the real value of allowances. We study the impact of wartime inflation by calculating tax revenue, the number of taxpayers, effective tax rates and indices of tax progressivity and redistribution under different inflation scenarios in Sweden, the United Kingdom, and the United States, during World War I and World War II. Our results show that inflation partially counteracted the progressive effect of increases in top marginal tax rates, particularly in Sweden during World War I and in the United Kingdom during World War II. However, the growth in income tax revenue as a result of bracket creep increased its redistributive impact

War inflation and taxation

Warfare has been commonly associated with increasing levels of inflation, with important implications for tax systems. In this chapter, we first review the literature on war finance and inflation, considering both the fiscal causes of inflation during wartimes and the effects of inflation on tax revenues. Second, we focus on developments in the income tax during the World Wars, building upon our previous work (Torregrosa-Hetland and Sabaté, 2022). We describe the mechanisms through which inflation affected progressivity and redistribution, by reducing the real value of exemptions, brackets and deductions (“bracket creep”). This led to the incorporation of new taxpayers into the income tax system and increased significantly the tax burden of those already included. Third, we study the issue of income tax legitimacy in the face of war inflation using a novel dataset of parliamentary debates and press articles in the United Kingdom. Other episodes of bracket creep have been associated with legitimacy challenges. We use natural language processing techniques to examine whether the effects of inflation on tax progressivity were a topic of discussion in national parliaments and the press, and the extent to which MPs and journalists identified inflation as a challenge to income tax legitimacy

Resource abundance and public finances in five peripheral economies, 1850s-1930s

The resource curse literature has established that taxation of natural resources might limit the long-term development of fiscal capacity in resource-rich countries. This article explores if, and how, natural resource abundance generates fiscal dependence on natural resource revenues. We compare five peripheral economies of Latin America (Bolivia, Chile, Peru) and Scandinavia (Norway, Sweden) over a period of 90 years, between 1850 and 1939. Both groups were natural resource abundant, but in the latter natural resource dependence decreased over time. By using a novel database, we find that fiscal dependence was low in Norway and Sweden, while high and unstable in Bolivia, Chile and Peru. This suggests that natural resource abundance should not be mechanically linked to fiscal dependence. An accounting identity shows that sudden increases in fiscal dependence were related to both economic and political factors: countries' economic diversification, and attitudes of the relevant political forces about how taxation affects the companies operating in the natural resource sector