The individual Laffer curve: evidence from the Spanish income tax

Melbourne Institute Working Paper No. 05/23

Date: April 2023


Ana Gamarra
José Félix Sanz-Sanz
María Arrazola


This paper characterises the Laffer curve of each individual taxpayer in a schedular multirate income tax with income shifting. Analytical expressions for the revenue-maximising tax rate and the revenue-maximising elasticity are provided for the individual taxpayer and the aggregate population, as well as new estimates of the Elasticity of Taxable Income (ETI). Applying these to the Spanish income tax demonstrates that 49.46% (58.49%) of the taxpaying population in the non-savings tax base (savings tax base) is on the "prohibitive" side ("normal" side) of the Laffer curve. On average, these taxpayers are 6.59 points (24.73 points) above (below) the maximum of the Laffer curve. The fraction of total tax revenue lost through behavioural responses amounts to 3.77%. However, this fraction varies by population subgroup and decreases when we account for income-shifting responses, suggesting the presence of fiscal externalities in the Spanish PIT.

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