The changes to the personal income tax scales that some regional governments have announced in recent months will have very different consequences from one region to another. The reason is hidden in the design of the deflations, which are essentially corrections to the tax scale to eliminate the effects of inflation. Thus, while some regions such as the Valencian Community or Murcia have modified the sections to relieve only taxpayers with less income, others such as Madrid and Andalusia have benefited the entire population with their plan.
The result is that while in all regions the lowest income brackets always benefit from a discount, in others, moreover, the wealthiest taxpayers take advantage of the system’s progressivity. According to an analysis prepared by the union of technicians of the Ministry of Finance (Gestha), while the richest 1% of the Valencian Community will not benefit from any savings, the richest 1% of Madrid will stop paying almost 1,700 euros .
Deflating personal income tax consists of adjusting the tax to prevent taxpayers from having to bear higher taxes in a scenario of high inflation. It can be done by adjusting the rates, but also other elements such as personal minimums.
Madrid and Valencia exemplify better than any the consequences of two antagonistic deflation models. According to Gestha data, a taxpayer with an average income of 22,725 euros will save 147 euros in the Valencian Community. However, the discount will be in Madrid of only 86 euros.
On the other hand, those with an average yield of 98,800 euros will pay practically the same in Valencia as if there had been no deflation, while in the capital they will stop paying 466 euros.
The differences are much larger when analyzing the great fortunes, with a payable base that ranges between 1.5 and 6.5 million euros. They are the richest 0.1% and the wealthiest 0.01% of the population. In the Valencian Community they will pay the same as other years in the 2022 declaration, while in Madrid they will save respectively 7,500 and 32,700 euros.
These numbers resulting from Gestha’s analysis focus on a single person with no personal or family responsibilities. In the case of a married taxpayer with two children filing an individual return and without charges, the regional x-ray is similar.
Madrid announced the first deflation at the beginning of 2022. From there, several regions joined the initiative, causing a tax war within national politics that has ended with the creation of new figures such as the tax on large fortunes .
By regions
As explained by the general secretary of Gestha, José María Mollinedo, the disparate effect of the scales that is observed in the amounts resulting from each autonomous community “derives from the different structure that has been given to the scale by each regional government.”
Valencia rearranges the bands and marginal rates by adding one more intermediate band. For this reason, the modification “focuses its effects on the middle class, particularly between 35,000 and 60,000 euros per year.” The savings for these taxpayers on the full state and regional tax that would have been derived from not deflating ranges between 3.7% and 1.5%. From 60,000 euros, for its part, there are no benefits because the regional government chose to raise the tax rate from 52,000 euros, in order to reduce the advantages that the richest would have reaped when going through the previous sections.
In Andalusia, Mollinedo continues, “the combined effect of modifying the width of the first three sections and the increase in the amounts of the autonomous personal and family minimums” achieves that the maximum effects are obtained at 22,700 euros. By not correcting the scale for higher incomes, these benefits also extend upwards.
Madrid opted to reduce marginal rates by 0.5 percentage points. This decision leads to the income of the upper sections accumulating the reductions of the previous sections, “so that it is the tax scale that has lost the most progressivity.”
Murcia follows in the wake of modifying the width of the first tranches, correcting the regressiveness in income above 60,000 euros.
Galicia focused savings on payable bases between 42,000 and 60,000 euros with a new scale. Although these effects extend to all levels of income, the Xunta maintained the rate of the previous scale for the part of income above 60,000 euros with the aim of mitigating its benefit.
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