Income Inequality and Redistribution in Spain: New Evidence Based on the World Inequality Lab Methodology

Income inequality has increased in many developed and developing countries over the last four decades, which has generated growing interest from the academic and policy communities in its measurement and determinants. 

The standard source for measuring income inequality and redistribution is household surveys, which tend to underestimate top incomes and do not capture countries’ total income, which may lead to inconsistencies in the study of the interactions between growth, inequality and redistribution. In order to overcome these limitations, Piketty and co-authors (2018) developed, under the umbrella of the World Inequality Lab what are known as Distributional National Accounts, based on a pioneering study for the United States. The authors combine tax data, surveys and national accounts to build series on the distribution of national income before and after taxes, transfers and public consumption. 

Building on this novel methodology, in this report we present the first income inequality series for Spain over the last two decades. We find the following results:  

→ The weight of capital income (25% of the total) has not grown as much relative to labour income (75%) as in other developed countries. 

→ Income inequality levels are higher than those obtained in previous studies based on surveys or tax data. The top 1% of earners receive between 13% and 17% of national income (and not 10% or 11% as previous estimates suggested).  

→ Income inequality fell during the years of the housing boom, but has increased since the outbreak of the 2008 financial crisis, mainly due to rising unemployment, wage cuts and the growth of financial income among the highest income groups. The share of national income of the top 1% of earners rose from 13% in 2007 to 17% in 2019. 

→ Tax revenue increased during the 1980s (from 15% to 26% of national income) and has remained relatively constant since then. However, the composition of revenue by type of tax has changed significantly. Corporate Income Tax gained importance relative to Personal Income Tax during the housing boom but with the arrival of the financial crisis its weight fell markedly. 

→ The system of taxes and transfers, together with public consumption on health and education, reduces part of income inequality. In 2019 the poorest 50% had 14% and 17% of income before and after redistribution, respectively. However, patterns of inequality do not change substantially through the redistributive action of the State. The progressivity of the tax system has fallen since the 2008 financial crisis. 

These results show that inequality is a complex, multidimensional phenomenon that must be addressed through different approaches and policies. Below, we set out the most important ones: 

→ Education policies need to be improved to close educational gaps, and progress must be made towards reducing high unemployment and temporary employment in order to raise the incomes of middle- and low-income earners. These changes should be accompanied by the promotion of a new productive model that creates new jobs and greater value added with the help of new technologies in sectors where the country has a comparative advantage.  

→ Excessive exposure to housing perpetuates a productive model based on bricks and mortar, increases systemic risks (given the limited diversification of wealth) and inevitably concentrates business profits among the richest. Financial education policies, incentives for wealth diversification and employee share ownership in their companies are needed.   

→ On taxation, it is key to increase the redistributive nature of the system. The most urgent measure is to reform Corporate Income Tax so that effective tax burden levels return to those seen before 2008. In addition, wealth taxation should be harmonised, in particular property taxes (IBI, Wealth Tax and Inheritance and Gift Tax), with a view to increasing the progressivity of the system.