How Did the ‘Dualization’ of the Spanish Income Tax Affect Horizontal Equity? Assessing its Impact Using Copula Functions

Abstract

The aim of this paper is to assess horizontal inequity (HI) caused by the introduction of a (semi-) dual structure for the Spanish personal income tax (PIT), adopting a copula function-based measurement framework. Following Bo et al. (2012), we estimate the Clayton, Frank and Gumbel copulas, belonging to the Archimedean class, to quantify the impact of the 2007 Spanish PIT reform on HI, comparing it with the previous tax design applied in 2006. In order to identify possible anticipation and adaptation effects, the analysis covers the 2004-2010 period. This research employs microdata from the Spanish PIT Return Panel. Results reveal two effects of the reform on the HI working in opposite directions: while the partition of the taxable income into two bases (one is taxed at ˜at rate) increases the HI, the transformation of personal and family allowances into tax credits reduces it. The predominance of one effect over the other depends on the equivalence scale applied.