Regional Tax Credits in the Spanish Income Tax: Assessment and Alternatives

We propose a microsimulation exercise using the Muestra IRPF 2002 IEF-AEAT, a sample of Spanish Income Tax Taxpayers. This exercise estimates the importance of income tax policy of Spanish regions, mainly developed through tax credits. Supposedly, this policy implies a significant cost in terms of tax design, legislative process, administrative and compliance costs. Nevertheless, the benefits seem to be scarce and vague. Our hypothesis here is that we can achieve a similar result with fewer costs. We consider two simpler choices: a slight cut in the regional tax rates, and the introduction, by each Autonomous Region, of a general tax credit.