1. FISCAL WELFARE, PROGRESSIVITY, AND DECENTRALIZATION: THE CASE OF SPAIN José A. Noguera Paula Hermida Group of Analytical Sociology and Institutional Design (GSADI) Universitat Autònoma de Barcelona (UAB)

2. FISCAL WELFARE AND POLITICAL VISIBILITY Fiscal welfare as ‘hidden’ social benefits. Lack of visibility and political transparency makes it attractive for regressive distributional purposes. Governments may be tempted to use it in order to channel resources to middle & high income groups in exchange por political support.

3. FISCAL WELFARE AND DECENTRALIZATION IN SPAIN Spain has been traditionally a very good example of regressive fiscal welfare. No comprehensive program of tax credits for low-income working families exist. In contrast, the variety and budget of social tax expenditures is sizeable: dozens of tax deductions and allowances which amount 18% of total income tax revenue (more tan 50% if general ‘personal’ allowances –not linked to specific welfare aims- are included). Political decentralization has been a breeding ground for regional political patronage. The 15 regional governments control 50% of income tax and have legal capacity to regulate it (two more control 100%). This produces a very fragmented and diverse, as well as less transparent, system of fiscal welfare.

4. HYPOTHESIS Departing from this situation, we expect that, despite budgetary constraints since the begining of the crisis, expenditure in fiscal welfare has been kept at a relatively high level its distributional impact has been mostly regressive social tax expenditures have proliferated at the regional level and have grown faster than those operating at the national level

5. DATA & METHODS We use the micro-data of the Income Taxpayers Panel (Institute for Fiscal Studies, Ministry of Finance) for 2008 and 2011 (last available). Representative sample of near 2 million income tax declarations, with a raising factor which allows to work with nearly 20 million cases (sampling error <1,1%, confidence level 99,7%). Excludes Navarra and the Basque Country (who control all their taxes). First comprehensive analysis of fiscal welfare in Spain, with real data on complete income tax declarations, which allow to estimate distributional impact. “Fiscal welfare” = all tax reductions and deductions explicitly linked to traditional ‘welfare’ functions: childbirth-adoption, childcare, schooling, health, pension plans, housing, disability, family care, unemployment or job training. Gross income deciles are calculated according to primary taxable income, from any source, before any reductions have been applied (excluding social security contributions).

6. FISCAL WELFARE IN SPAIN (I): EXPENDITURE 20082011 Rate of variation (%) National government 12.994.750.951,7010.726.861.220,14-17,45 Reductions in taxable income 6.021.955.343,485.534.217.863,80-8,10 Tax deductions 6.972.795.608,225.192.643.356,34-25,53 Regional governments 172.859.605,10405.152.248,39134,38 TOTAL 13.167.610.556,8011.132.013.468,53-15,46 Total expenditure in fiscal welfare has been reduced from 2008 to 2011. But this aggregated trend hides a huge relative increase in regional expenditure We find the opposite trend in the national level, with deductions being reduced more than reductions of taxable income, Anyway, the bulk of the expenditure is concentrated in the national level.

7. FISCAL WELFARE IN SPAIN (I): EXPENDITURE 20082011 Rate of variation (%) ANDALUCÍA16.335.603,9328.635.433,0875,29 ARAGÓN819.242,51648.356,50-20,86 ASTURIAS3.039.115,158.659.731,73184,94 BALEARES4.948.649,5411.931.475,98141,11 CANARIAS39.789.363,2948.937.296,3522,99 CANTABRIA1.514.005,843.376.668,39123,03 C. LA MANCHA10.446.458,9422.907.553,63119,29 C. LEÓN10.221.703,0544.033.939,13330,79 CATALUÑA22.782.636,1936.031.825,4858,15 C.VALENCIANA29.131.462,0068.080.699,80133,70 EXTREMADURA4.084.228,657.296.747,7478,66 GALICIA3.181.298,4818.283.564,74474,72 MADRID24.495.507,9899.264.675,74305,24 MURCIA55.803,235.112.585,059061,81 LA RIOJA 2.014.526,321.951.695,05-3,12 TOTAL 172.859.605,10405.152.248,39134,38 Expenditure in fiscal welfare by regional government (in €) All regions except two have increased the expenditure in fiscal welfare. 12 out of 15 have introduced new tax deductions, while the trend at the national level is to reduce its number. This suggests that regional governments have tried to partially compensate national level cuts.

8. FISCAL WELFARE IN SPAIN (III): DISTRIBUTIONAL IMPACT Regressive pattern. Intensified slightly from 2008 to 2011.

9. FISCAL WELFARE IN SPAIN (III): DISTRIBUTIONAL IMPACT Reductions in taxable income are more regressive than deductions, but both are regressive.

10. FISCAL WELFARE IN SPAIN (III): DISTRIBUTIONAL IMPACT At the regional level, the middle income deciles are the most favoured ones. This is the effect of: Upper income thresholds for some deductions. Regional fiscal welfare is all tax deductions (not reductions in taxable income). Still, the upper deciles get much more resources than the lower ones.

11. FISCAL WELFARE IN SPAIN (III): DISTRIBUTIONAL IMPACT There is a remarkable degree of variation in distributional patterns at the regional level: In some regions, the middle income deciles are the most favoured ones.

12. FISCAL WELFARE IN SPAIN (III): DISTRIBUTIONAL IMPACT

13. Given a certain expenditure threshold, there seems to be a distributional trade-off between benefitting the richer and the poorer

14. FISCAL WELFARE IN SPAIN (III): DISTRIBUTIONAL IMPACT

15. Decomposing the expenditure in particular tax deductions may also show very different distributional patterns, and therefore the importance of case-by-case analysis.

16. FISCAL WELFARE vs MINIMUM INCOME SCHEMES How to better identify political commitments for regressive/progressive distribution? Relevant comparative analysis of fiscal welfare with minimum income schemes, since 1) both are cash benefits; 2) MI have a progressive impact; 3) both are equally decentralized (there are 17 regional minimum income schemes with completely different regulations); 4) and both are similar in terms of total expenditure: o 479 m€ in MI vs 405 m€ in FW (2011) o 231 m€ in MI vs 172 m€ in FW (2008)

17. FISCAL WELFARE vs MINIMUM INCOME SCHEMES The ‘U’ inclined to the right suggests a trade-off beyond a certain point between spending in fiscal welfare and in mínimum income schemes. Regions that treat well the better-off through tax benefits tend to be those who spend less in minimum income programs. This suggests that distributional patterns of regional fiscal welfare have to do with political commitments to regressive policy options.

18. FISCAL WELFARE vs MINIMUM INCOME SCHEMES

19. FURTHER PROBLEMS Need of more case-to-case research into the specific policy process behind particular tax deductions. Need to refine and test explanations: Why fiscal welfare tends to be regressive? Which are the factors behind the variability of this distributional pattern? Is favouring the middle income deciles a way of attracting the median voter? Does the distance between effective and marginal tax rates have to do with low tax morale and opening legal ways for the rich to escape from high tax burden?

20. Average income tax rates in Spain before and after applying tax benefits (by deciles)

21. FURTHER PROBLEMS Non-transparency of ‘hidden’ fiscal welfare is often taken as a temptation for governments to apply regressive policy options, but the opposite may also be the case, so… Need to relate this discussion with the study of citizen’s attitudes towards redistribution and progressivity. Hypothesis: the degree to which fiscal welfare is more or less ‘hidden’ and more or less ‘regressive’ is related to public opinion preferences for redistribution. But also take into account that public support for specific benefits may not be mainly based on redistributive concerns. Finally, need to relate this with the power balance between social agents.

22. THANKS FOR YOUR ATTENTION

23. Fiscal costs of the main national tax allowances and deductions