Spain | Disagreement over the taxation of the minimum wage

Summary

The debate over the taxation of the minimum wage under Personal Income Tax has been raging relevant in recent months, mainly over two concerns that have fueled the discussion.

Key points

• Key points:
• The first is that in Spain, 13% of wage earners earn the minimum wage, a higher proportion than in any other European country. The fact that the minimum wage lies fairly close to the common wage further increases its significance when it comes to the question of personal income tax, and could affect the viability of firms and the employment rate if an increase in productivity does not accompany it.
• The second has to do with the fact that, while Spain has one of the most progressive personal income tax systems in the EU, its design can lead to situations where workers whose wages barely exceed the tax-exempt minimum are confronted with excessively high marginal rates, with workers being taxed at more than 45% of the wage increase, which is not conducive to economic progress.
• A tax reform is needed to redesign the progressive nature of personal income tax so that tax rates increase gradually, without stops and starts, thus avoiding disproportionate tax burdens. It is also advisable to adjust the tax reductions to eliminate abrupt increases in taxation.
• Greater transparency and participation in personal income tax: Requiring all citizens to file a personal income tax return would make revenue policies more efficient, promote tax awareness and reduce the underground economy.
• As the main source of government tax revenue, personal income tax must be reformed to avoid penalizing low-income earners and to ensure that taxation of the minimum wage is ultimately fair, thus facilitating economic growth and social mobility.

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