The public coffers have made money with the inflation of recent years, especially with personal income tax. The Bank of Spain estimates that not deflating this tax – that is, not adapting the amount of its rates or its tax benefits to inflation – has allowed the Treasury to collect 11,000 million euros more since the pandemic than it would have achieved if it had adapted the tribute to the rise in prices.

This follows from an analysis published by the Bank of Spain this Tuesday within the framework of its annual report.. A document in which the banking supervisor reviews the main events that have surrounded the Spanish economy in 2023 and the structural challenges facing the country.

The deflation (or not) of personal income tax has become a cause of dispute between the Government and the opposition. The PP has championed this measure and the communities it governs have applied tax deflations (something that some regional governments in the hands of the PSOE have also done). On the other hand, the central Executive has rejected this measure on different occasions, considering that it mainly benefits high incomes.. The Government also defends that it has already reduced the tax on low incomes through the reduction for income from work.

According to the supervisor's work, between 2019 and 2023, personal income tax collection increased by 38,000 million euros. Of them, 26,000 million are explained by the widening of the tax base. This is, because there are more people working or obtaining other types of income and because the income they obtain has increased.. However, a non-negligible amount of this gain (11 billion, 29% of the increase) is explained by the so-called “cold progressiveness”. That is, the non-deflation of the tax elements.

If we measure personal income tax revenue over GDP – a metric that allows us to know how much is obtained from this tax compared to what the economy produces – the Bank of Spain estimates that half of the increase in collection is due to non-deflation. Revenue from this tax has gone from 6.9% of GDP in 2019 to 8.5% in 2023. In fact, if the trend continues, they could reach 9% in 2024 if rates are not adapted.

The non-deflation of the rate has meant that the average rate paid by taxpayers (that is, the percentage of their income that will be paid personal income tax) has increased. Specifically, this percentage has gone from 12.8% in 2019 to 14.7% last year. Of this increase, the supervisor maintains, 70% is the fault of the non-deflation of the tax.

The middle classes, the most affected

The Bank of Spain explains that, in general, for every 1% that a taxpayer's income increases (whether due to a salary increase, earnings from savings, rent, home sale…), the fee they have to pay increases. 1.85%. For example, for a taxpayer with an income of 33,700 euros, these percentages translate into an increase in income of 337 euros resulting in an increase in the amount payable of 101 euros.

However, cold progression does not affect everyone equally.. The effects are especially focused on taxpayers with “average” incomes. Taxpayers with income between 16. 385 and 19,873 euros are the ones that notice it the most. For every 1% that their income increases, the fee to pay increases by 10%. In the case of filers with income between 19,873 and 23,988 euros, the relationship is four to one. The effect of cold progressivity is often diluted as income increases. However, the 30% of taxpayers who earn the least income (that is, income of up to 16,385 euros) are not affected by no deflation.

Cold progressivity affects in two different ways. Firstly, if the amounts that delimit tax benefits such as reductions in the tax base or tax deductions are not updated when prices or wages rise, they lose their effects.. The second way occurs when the amounts that delimit the tax brackets are not touched.. These amounts reflect a certain standard of living, but were set more than ten years ago. The rise in prices and salaries since then means that a salary of 22,000 euros gross (to give an example) now has less purchasing power than before the pandemic.. However, you pay the same personal income tax as you did then.

The supervisor has confirmed that non-deflation has also produced a reduction in inequality in the distribution of income. Income differences between the richest 10% and the poorest 10% after taxes have narrowed. Of course, although redistribution has increased, progressivity has been reduced: the difference between the average rate paid by the wealthiest taxpayers and those with the lowest incomes has been reduced.

However, deflating personal income tax means giving up an important source of income at a time when Spain will have to face fiscal adjustments to balance its deficit and public debt levels.. From Brussels and from more and more international organizations, messages continue to be sent to the Government to present a consensual adjustment plan as soon as possible.