The aim of this research is to analyse how inflation induced erosions of the nominally
defined items of the tax rules of the Spanish income tax system, and how that may
change distributional and revenue generating properties of income taxes. We further
investigate the effects of the tax reform carried out in 2003. Although the Spanish
government claimed that this reform would reduce tax liabilities, this is not so clear as
many argue that this reform only offset the effects of inflation suffered by the
population since 1999. Using the European Community Household Panel (ECHP) data
set we aim to shed some light on the above issues through microsimulation techniques.
Furthermore, we will also measure the inequality effects caused by the fact that the
Spanish tax system does not automatically adjust the main fiscal elements to account for
inflation