Can taxes be raised without taxes rising? Something like this happens with personal income tax, for which taxpayers pay more without the need for the Government, at least the central one, to modify its rates. Being progressive, the percentage increases as income increases, and that is what has been happening in recent years, especially since inflation skyrocketed and salary reviews began.
The real rate that taxpayers in Spain pay for personal income tax has grown strongly in recent years and explains most of the improvement in tax revenue since before the pandemic. According to calculations by the Bank of Spain, effective personal income tax rates have gone from 12.8% in 2019 to 14.7% in 2023, and the forecast is that they will reach 15.3% in 2025.
This trend is due to what is known as “cold progressiveness.” Salary increases, largely motivated by inflation, also cause in some cases to skip income tax brackets, which increases the tax payment by a higher percentage.
The Bank of Spain itself gives the example of a worker with an income of 33,700 euros and a personal income tax fee of 5,472 euros, who by charging 1% more would pay 1.85% more for this tax.
The effect has been only partially offset in the autonomous communities in which personal income tax has been deflated, which are Madrid, Aragón, Extremadura and Navarra. However, the reduction only affects the regional section of the tax, so the consolation is relative.
According to calculations by the Bank of Spain, personal income tax collection has increased by 44% between 2019 and 2024, going from 86 billion euros to 124 billion euros.
The main cause of the increase, of 38,000 million euros, is “cold progressiveness.” If it were not for these additional income thanks to the jumps in sections, the personal income tax would have collected 11,000 million euros less.
In its annual report, the Bank of Spain cites personal income tax as the tax that has contributed the most to the improvement in collection – of the 2.5 points of improvement, 1.5 are for this reason – and, at the same time , attributes half of this contribution to “cold progressiveness.” The other half has to do with the increase in the number of contributors and the improvement in economic activity.
The general director of Economy of the Bank of Spain, Ángel Gavilán, warns that indirect taxes such as VAT “distort less than direct taxes”, such as personal income tax, and considers that Spain should have more weight on the former and less on the latter. to resemble the surrounding countries. The contribution of indirect taxes has gone from 32.6% in 2019 to 30.1% in 2023.
The Bank of Spain believes that there is “need and margin” to review the tax outlook and warns that the country would need to apply fiscal adjustments of between four and six tenths of GDP per year to meet structural objectives.
The effort would be equivalent to between 5,800 and 8,700 million euros and would serve to bring the ratio of public debt to GDP to around 80% in 2040, compared to the path of not addressing the adjustments, which would place the percentage at 120 %.
