The accumulated inflation since 2008 unleashes a rise in personal income tax that is close to 700 euros per declarant

From 2008 to the end of 2021, inflation has increased by more than 22% in Spain. This rise in prices has also been accompanied by a rise in wages (18.68% until 2020, according to Eurostat). But on the other hand, in the face of these variations in prices and salaries, the structure of personal income tax has been maintained (tranches, bonuses… have not been adapted to inflation). If average nominal wages rise while personal income tax brackets remain static, the average effective rate paid by each taxpayer increases even though real wages (after inflation) have not grown.

For example, a worker who earns 20,000 euros pays a marginal rate of 24%. If your salary rises by 6%, for example, to compensate for an identical rise in inflation, you would earn 21,200 euros and, in principle, it would cushion the impact of that inflation.

However, this is not the case because from 20,200 euros the personal income tax bracket jumps from 24% to 30%, so that the taxpayer would have to pay 37% for 1,000 of the 1,200 euros that his salary has increased. If, on the contrary, the sections were adjusted for inflation, that next section would not start until 21,412 euros, so the worker will continue to pay the same effective rate (as before the salary increase) and the same marginal rate of 24%, conserving their purchasing power.

Deductions, bonuses…

On the other hand, there is the impact of the rise in inflation in deductions, exemptions, bonuses and reductions, Perhaps the most complex to understand. These reductions in the tax base are usually set in nominal terms, so that higher inflation reduces these figures in real terms, reducing the taxpayer’s tax savings.

In addition, these deductions, exemptions etc. As they are fixed amounts expressed in monetary terms, they tend to benefit taxpayers with lower incomes to a greater extent (in relative terms). “So, on the one hand, it reduces in real terms the exempt minimums and reductions applied in the quantification of the taxable base. On the other hand, it distorts the magnitude of the real income subject to taxation”, highlights José Félix Sanz, professor of Applied Economics from the Complutense University of Madrid, author of the work.

More than 14,000 million since 2008…

In a new work, José Félix Sanz completes the study published a few weeks ago (it only calculated the impact of 2020 inflation on the personal income tax that we will pay in 2021) adding the calculation of the fiscal drag that originates from the accumulated inflation between 2008 and 2020. It is confirmed that the total cost of the tax liability during 2021 will amount to 14,379 million euros (698 euros per filer), of which 4,110 million comes from the 6.5% inflation rate of 2021 and the rest ( 10,269 million) to the accumulated inflation between 2008 and 2020. “Consequently, the income tax installments that we will pay in 2021 will have a purely nominal origin not only due to the inflation of 2021 but also due to the accumulated inflation between 2008 and 2020”, assures this expert.

Between 2008 and 2020, prices have shown a highly stable trend. In those twelve years, inflation only increased by 12% in Spain, which has cooled the social demand when demanding a tax system that is updated with the evolution of inflation on a frequent basis. For example, between 1970 and 1982 (many analyzes compare the current situation with that of that decade), inflation increased by more than 450%.

Price stability in recent years has left this phenomenon known as ‘cold progressivity’ in the background. José Félix Sanz explains that “this type of progressivity has the peculiarity of going relatively unnoticed since it involves a covert tax increase that does not require discretionary action by the government.” In an environment of low inflation and salary moderation, it goes even more unnoticed.

…Of which 4,110 million are from 2021 alone

However, the strong awakening of inflation in 2021 and its prolongation during 2022 has brought this debate back to life. In a study by the same author published a few weeks ago, the increase in the tax bill that will cause inflation at the end of 2021 in personal income tax was estimated at 4,110 million euros (199 euros on average per declaration).

Jorge Onrubia, Professor of Public Finance at the Complutense University of Madrid and FEDEA researcher, explained a few weeks ago in a statement to elEconomista that “the need to adjust the structure of personal income tax to inflation, in all its elements, is desirable so that the tax distributes its burden equitably,” says Onrubia.

This economist pointed out that if, when these elements were approved, the distribution of the burden was what was considered fair (both in terms of vertical and horizontal equity), all these displacements of the effective tax will give rise to a new distribution of the burden, which will not take into account the real payment capacity, but the nominal one, with the consequent loss of vertical equity (how the effective average rate increases when income increases) and horizontal (similar treatment to taxpayers with similar real payment capacities, since not all income categories will have the same impact of inflation).