null The redistributive effects of social benefits and taxes: a review of the current situation

The redistributive effects of social benefits and taxes: a review of the current situation

Luis Ayala, UNED and Equalitas
Olga Cantó, Universidad de Alcalá and Equalitas

Spain is one of the EU countries with the highest levels of income inequality. This feature is not exclusive to recent times, although the intensity and length of the latest economic crisis caused the indicators to increase more than in other countries. In the recent stage of recovery of economic activity and employment, inequality has shown some reluctance to fall, which indicates that it possesses a significant structural component. The most usual explanations have revolved around two key factors: the unique nature of the Spanish labour market, with high levels of unem¬ployment and high job insecurity in the comparative context, and the weakness of the redistributive capacity of the tax and social benefit system. Any attempt to ex¬plain inequality in this country must involve identifying which instruments within that tax and transfer system have an equalising effect on income and which do not.
Key points
  • 1
       One of the main reasons why Spain has such high levels of inequality is the lower capacity of the system of taxes and benefits to reduce the inequalities that occur in the distribution of primary income.
  • 2
       The main advances in the reduction of inequality in Spain took place in the 1980s with the development of social benefits and progressive taxation. During the last crisis inequality grew and during the recovery it has decreased very slowly in comparison with the revival of employment.
  • 3
       Pensions are the instrument with the largest redistributive effect, as happens in other high-income countries. Unemployment benefits have a stronger effect on income distribution than in other countries, but their role has been waning due to the fall in the coverage rate and the increasing importance of the welfare mode, with lower protective intensity than the contributory mode.
  • 4
       The redistributive capacity of the last economic safety net – the system of income guarantee benefits – is very limited. Unlike other countries, Spain has no one sin¬gle safety net but rather a complex mosaic of benefits, with protection gaps and major regional differences in protection against the risk of poverty.
  • 5
       In clear contrast with what happens in those European countries with more robust welfare states, family benefits in Spain have very little effect on income redistribution.
  • 6
       Health spending in Spain has a strong redistributive effect, the largest of social benefits in kind. Over the last decade, the cuts made in some areas, such as pharmaceutical expenditure, have diminished its progressivity.
  • 7
       The overall effect of spending on education in Spain is redistributive, although less so than that of health expenditure. However, not all spending is progressive, and significant problems connected to inequalities of social origin persist, including early school leaving.
  • 8
       Income tax in Spain is the second most redistributive instrument after pensions. Its capacity to correct inequality has lessened over time owing to the process of tax rate reduction.
  • 9
       Spain is no exception to the rule whereby indirect taxation is gaining more and more importance within public revenue as a whole. VAT is a regressive tax and its reforms have reinforced this feature. Albeit with a minor impact, other consump¬tion taxes, such as excise taxes, are also regressive.
  • 10
       Wealth taxes contribute little to redistribution and are significantly limited by the low levels of tax compliance, certain exemptions, regional inequalities and problems of tax evasion and avoidance.

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Authors

Luis Ayala , UNED and Equalitas
Olga Cantó , Universidad de Alcalá and Equalitas

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Contents of the collection

This report is part of the collection

Reports on the Redistributive Economy

made up of the following publications:

The redistributive effects of the system of taxes and transfers in Europe

The redistributive effects of family policies

The redistributive effects of wealth tax

The redistributive effects of special taxes

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