Optimal Taxation and Decentralization: The case of the PIT
Given the tax power in hands of the Autonomous Communities (ACs) in the PIT, we wonder whether decentralization might be welfare-enhancing. To asses this, we focus on a paradigmatic legal element: the top marginal tax rate on labor income. Taking advantage of the theoretical framework of the recent optimal tax theory (Saez, 2001), we compare – from microdata of the Survey of Life Conditions (conducted by the Spanish National Statistical Institute – the real rates with the optimal ones. There is a discrepancy for all ACs; being for all of them the optimal rate above the real one. The average discrepancy is 10 percentage points (p.p.), being maximum (minimum) for the AC of (Navarre), 23 (2) p.p. In any case, taking the tax rate in absence of subcentral legislative action as the benchmark, all but four ACs have set their tax rate closing the gap with their optimum.
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