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A Simulation of the Effects of the Personal Income Tax Reform on the Tax Burden

The new Personal Income Tax Law came into force in January 2007. The main changes with respect to the previous regulation are the new tax treatment of personal and family circumstances and saving returns. This study aims to quantify the overall effect of the reform on tax revenue and to assess its redistributive impact by considering the different main income sources. In order to attain these objectives, we have used an Instituto de Estudios Fiscales sample of 2002 income tax returns to construct a baseline scenario for 2007 to simulate the reform. The reform will involve a moderate tax cut in relation to the baseline scenario. However, in relative terms, the tax reduction will be especially intense for lowest income and joint returns. Pensioners, recipients of business and professional incomes and dependent employees, though to a lower extent, would benefit from lower taxes. Lastly, the reform of the personal income tax is estimated to increase progressivity moderately, although lower tax revenues will imply lower redistributive capacity.