The richest 1% pay less taxes on their income than the poorest 20%

The philosophy of the Spanish tax system rests on the concept of progressivity, that is, those who have the most pay more. However, a series of dysfunctions in a large part of the taxes causes the average tax rate borne by the richest households in the country to plummet, far below what they would theoretically receive. Consequently, the wealthiest 1% is effectively taxed on all of their income at a lower rate than the rest of taxpayers, including those who make up the poorest 20%.

The effective rate is obtained by crossing the total amount of taxes paid by a household between its gross income. And it generally grows as income increases, as can be seen in the Observatory on the distribution of taxes and benefits among Spanish householdspublished by the Foundation for Applied Economics Studies (Fedea).

The analysis, signed by researchers Julio López Laborda, Carmen Marín and Jorge Onrubia, divides the 18.9 million households that existed in 2021 into quintiles, that is, five equal parts. The last quintile, in turn, is disaggregated into centiles to obtain a much more precise x-ray of the group that receives the most income.

From here, the experts conclude that the poorest 20% of the population endured an average effective rate of 28.2%, a figure that rose little by little to the maximum of 39.9% that was recorded for the group of centiles that range between 91 and 99. Here the progressivity ends, because upon reaching the 100th centile – which are the 189,000 richest households in the country – the effective rate fell to 23.9%, the lowest of all.

To carry out the analysis, the researchers have considered the effects of personal income tax, corporate tax, wealth tax, VAT, ITP and AJD, special taxes and the tax on insurance premiums. Social contributions payable by the worker or self-employed person and the employer are also added. A detailed look at each of them allows us to identify, therefore, where the problems lie.

The major failure, as detailed by Carmen Marín, is mainly explained by “the effect of indirect taxes”, characterized by their regressivity. The great exponent of this phenomenon is VAT, since, having an indirect nature and similar tax rates without discerning who consumes the taxed good or service, it affects those who have the least income the most.

For this reason, the highest average rate of this tax, 12.4%, corresponds to the poorest 20% of the population. This decreases significantly to 8.1% in the second income quintile and continues to fall as income increases to the floor of 1.3% that falls on the wealthiest 1%. Consequently, the VAT “behaves in a regressive manner.” In fact, after the application of these taxes “inequality increased by 2.7% in Spain.”

The solution to this problem is particularly complicated due to the nature of the tax. The reduced rates, partly designed to reduce the tax burden of consumers with lower economic capacity, do not fulfill their function because their consumption does not vary excessively along the income scale. For this reason, Marín suggests, one possibility would be to establish a single rate whose revenue would be used to combat inequality through other means.

Another failure of the tax model occurs in personal income tax, coincidentally the most progressive tax in the system. Again, although it rises gradually as economic capacity grows, the average rate sinks again when the richest 1% of the population is analyzed: if the group of centiles that goes from 91 to 99 pays taxes at 16.1% , the 100th centile does it at 10%.

This is largely explained by the factor of corporate income, which includes both dividends received and undistributed corporate profits. When paying personal income tax, all these concepts are integrated into the savings tax base, with lower tax rates than the general base. Since most of the income of the richest 1% comes from capital income, the average effective tax rate is diluted.

Social contributions also present deficiencies. For example, households located in the first quintile have the highest effective rate of all brackets, over 5%. This is explained by the application, particularly to self-employed workers, of minimum contribution bases on which they must contribute even if their income is lower than the same or even when they incur losses. On the other side are the households of the top 1%, who support an effective rate of less than 2%, the lowest of all by far. “This is explained by the existence of maximum bases, which leave an important part of the highest salaries free of taxation,” says Marín.

All of these distortions have been common for several years. Only in 2020, an atypical year marked by the pandemic, did the effective rate of the richest 1% approach the average. This was largely due to the drop in the gross income of these households, caused mainly by the collapse of investment.

In 2021, however, the economic capacity of the wealthiest group shot up by 52%, going from 280,551 euros to 426,228 euros annually. Therefore, while the average tax throughout the country fell by only 0.5 points, that of 1% fell by more than 11.

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