Middle-Class Tax Burden Rises by €1,100 Annually Due to Inflation
Recent data shows a significant increase in Spain's tax revenue, predominantly impacting the middle class as inflation rises.
In 2024, Spain's Tax Agency reported a €40 billion increase in revenue from personal income tax (IRPF) compared to 2019 figures, alongside an additional €18 billion from value-added tax (VAT), reflecting growth rates of 48% and 26%, respectively.
This surge is notably higher than the combined growth of the national economy and job creation, a trend attributed primarily to inflation.
A study conducted by Funcas has detailed the financial impact of escalating prices on household tax bills.
Middle-class families, in particular, have been identified as the most adversely affected group during this inflationary period.
Households are facing an average additional tax burden of €1,100 per year from VAT and IRPF in comparison to 2021 price levels.
The inflationary pressures have led to a reduction in the public deficit and have funded various public expenditure programs initiated by the government and regional authorities in recent years.
The effects of inflation diverge between VAT and IRPF; while the VAT is a fixed-rate tax established at 21%, which does not change with inflation, IRPF operates on a progressive scale, resulting in increased effective tax rates as incomes rise.
Consequently, salary increases meant to counteract inflation are met with a higher tax burden, leading to what is termed as 'fiscal drag'.
Funcas’s analysis particularly highlights the implications of the non-deflation of IRPF brackets.
It examines how inflation affects households differently based on income.
Lower-income households have experienced a disproportionately severe impact as a larger percentage of their expenditures go towards essential goods like food and energy, which have seen substantial price increases.
Research conducted by Desiderio Romero-Jordán indicates that the cumulative impact of inflation over the four-year period from 2021 to 2024 ranges from an additional €92 for lower-income classes to €9,748 for the highest earners.
For the middle and lower classes (annual incomes ranging from €21,000 to €30,000), the effect of non-deflation on IRPF has resulted in an additional €458 in taxes, while middle and upper-middle-class brackets (annual earnings from €30,000 to €60,000) have faced an increase of €622 per taxpayer.
The analysis suggests that middle-income earners have been particularly disadvantaged by the lack of indexation in tax brackets; although they constitute approximately 58% of IRPF revenue, they account for 61% of the revenue increase stemming from inflation.
The lack of adjustment in the IRPF tax bands has been characterized as an implicit tax reform that avoids parliamentary approval, functioning similarly to an actual tax increase.
This unindexed taxation has resulted in an effective tax increase amounting to nearly €10 billion annually.
The non-indexation could fully fund the elevated defense spending commitments made by Spain, leaving a surplus of over a third of the necessary amount.
The Spanish government has suggested that the significant revenue accrued from this non-deflation should be recognized by the European Commission as a form of tax increase aimed at addressing public sector budgetary imbalances, representing a covert tax hike with substantial implications for families across the nation.
This surge is notably higher than the combined growth of the national economy and job creation, a trend attributed primarily to inflation.
A study conducted by Funcas has detailed the financial impact of escalating prices on household tax bills.
Middle-class families, in particular, have been identified as the most adversely affected group during this inflationary period.
Households are facing an average additional tax burden of €1,100 per year from VAT and IRPF in comparison to 2021 price levels.
The inflationary pressures have led to a reduction in the public deficit and have funded various public expenditure programs initiated by the government and regional authorities in recent years.
The effects of inflation diverge between VAT and IRPF; while the VAT is a fixed-rate tax established at 21%, which does not change with inflation, IRPF operates on a progressive scale, resulting in increased effective tax rates as incomes rise.
Consequently, salary increases meant to counteract inflation are met with a higher tax burden, leading to what is termed as 'fiscal drag'.
Funcas’s analysis particularly highlights the implications of the non-deflation of IRPF brackets.
It examines how inflation affects households differently based on income.
Lower-income households have experienced a disproportionately severe impact as a larger percentage of their expenditures go towards essential goods like food and energy, which have seen substantial price increases.
Research conducted by Desiderio Romero-Jordán indicates that the cumulative impact of inflation over the four-year period from 2021 to 2024 ranges from an additional €92 for lower-income classes to €9,748 for the highest earners.
For the middle and lower classes (annual incomes ranging from €21,000 to €30,000), the effect of non-deflation on IRPF has resulted in an additional €458 in taxes, while middle and upper-middle-class brackets (annual earnings from €30,000 to €60,000) have faced an increase of €622 per taxpayer.
The analysis suggests that middle-income earners have been particularly disadvantaged by the lack of indexation in tax brackets; although they constitute approximately 58% of IRPF revenue, they account for 61% of the revenue increase stemming from inflation.
The lack of adjustment in the IRPF tax bands has been characterized as an implicit tax reform that avoids parliamentary approval, functioning similarly to an actual tax increase.
This unindexed taxation has resulted in an effective tax increase amounting to nearly €10 billion annually.
The non-indexation could fully fund the elevated defense spending commitments made by Spain, leaving a surplus of over a third of the necessary amount.
The Spanish government has suggested that the significant revenue accrued from this non-deflation should be recognized by the European Commission as a form of tax increase aimed at addressing public sector budgetary imbalances, representing a covert tax hike with substantial implications for families across the nation.
Translation:
Translated by AI
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