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IEB25-08_Balladares+GraciaMiralles.pdf (1.87 MB)

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Working paper

Publication date

2025

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cc-by-nc-nd, (c) Balladares et al., 2025
Please use this identifier to cite or link to this item: https://hdl.handle.net/2445/223025

Fiscal drag with microsimulation: Evidence from Spanish tax records

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Abstract

Fiscal drag arises when nominal tax parameters remain unchanged despite nominal income growth, thereby increasing effective tax rates and revenue. We use Spanish administrative tax records and a detailed microsimulation model to examine fiscal drag in personal income taxation through two complementary approaches. First, we estimate tax-to-base elasticities to assess the progressivity of the tax system and potential fiscal drag under homogeneous income growth. We uncover significant heterogeneity in elasticities across income sources, across the individual income distribution and in the underlying mechanisms. Second, we conduct counterfactual simulations to quantify the actual impact of fiscal drag from 2019 to 2023, finding it accounts for about a third of revenue growth. Our findings offer insights for public finance modelling, revenue forecasting, and tax policy design.

Subject

Inflació, Impostos, Mètodes de simulació

Subject (English)

Inflation, Taxation, Simulation methods

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IEB (Institut d’Economia de Barcelona) – Working Papers

Citation

BALLADARES, Sofía and GARCÍA-MIRALLES, Esteban. Fiscal drag with microsimulation: Evidence from Spanish tax records. IEB Working Paper 2025/08. [consulted: 17 of August of 2026]. Available at: https://hdl.handle.net/2445/223025

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