Tax perception, welfare and labour supply: The spanish case

Abstract

This paper investigates the tax perception of the married Spanish man in the economic context in which he takes labour supply decisions. In order to obtain the marginal tax rate perceived by the worker, we estimate simultaneously and by means of non-linear-methods a labour supply function together with a perceived tax scale. The results suggest the existence of prominent divergencies between subjective perception and formal income tax rules. In addition, the effects of this gap on public policy design are also assessed. In particular, this paper is expanded to evaluate the welfare impact of this tax rate discrepancy. A relevant implication of this welfare analysis is that while labour supply models specified in terms of statutary marginal tax rates underestimate the aggregate exces burden associated with income taxation, individual’s welfare loss is overestimated.