Spain is one of the EU countries with most inequality in the distribution of house­hold income. The differences, however, are much less marked when comparing income inequality before taxes (income tax, consumption tax, etc.) and benefits (pensions, unemployment benefit, etc.), known as primary income. This divergence reveals that one of the main reasons for such high levels of inequality is the lower capacity of the tax and benefit system to reduce the inequalities that occur in the distribution of primary income.

As Graph 1 shows, inequality measured in terms of the Gini index (the values of which range from 0, maximum equality, to 1, minimum equality) before the tax and benefit system comes into play is not very different from that of other high-income countries, whereas when it is measured using disposable income (after applying tax­es and benefits) Spain is one of the European countries where these differences are largest. Any attempt to explain inequality in this country must therefore involve identifying which instruments within that tax and transfer system have an equalis­ing effect on income and which do not. 

Comparisons over time of income distribution in Spain are subject to frequent meth­odological disruptions and changes in the size and reliability of surveys. The only surveys that enable us to study inequality in the long term are the various House­hold Budget Surveys (Encuestas de Presupuestos Familiares or EPF) that have been conducted periodically since the early 1970s. On analysing them we find that in the 1970s the intense economic crisis did not give rise to a large increase in inequality. Even though unemployment grew rapidly, its effect on inequality was offset in part by the notable increase in wages and the development of the basic instruments of the welfare state, including the implementation of a much more ambitious system of progressive taxation.

During the 1980s there was a notable reduction in inequality, in which the growth in social spending in the second half of the decade was a determining factor. After something of an upturn in inequality in the first half of the 1990s as a result of a brief but intense period of recession, inequality indicators remained very stable through the lengthy economic boom that lasted from the mid 1990s to 2008. The sharp rise in unemployment and the widening wage gap, together with cuts in redistributive policies, caused inequality to increase very notably during the crisis, and to do so, moreover, faster than in most European countries. As we can see in Table 1, while lower incomes fell much more than the median, the same cannot be said of the op­posite end of the distribution.

Contributory pensions are the chief instrument for equalising income gaps in Spain and reduce the Gini index by 20 percentage points (Graph 2). Although a distribution system is not designed with explicit redistribution goals in mind, there are several channels through which an income gap moderating effect of this sort occurs. The main redistributive effect of  pensions occurs through redistribution from higher wage earners to those who have lower wages and shorter contribution periods. The existence of minimum and maximum pensions  helps, by definition, to narrow the gap between the incomes paid to the recipients of these benefits. Furthermore, the system redistributes among the different generations of workers, since, given that pensions are not funded through past individual contributions but present ones, improvements in income levels and wages result in a transfer of income from present generations of workers to past ones.

Unemployment benefits constitute one of the most important instruments of public intervention in the field of income maintenance programmes. The mere fact that the public sector provides a safety net in the face of the impossibility of lower-income workers being able to cover their own risk of unemployment implies redistribution. The definition of this form of protection makes no explicit link between contributions paid and the probability of unemployment; rather, they depend on each worker’s wage. In practice, workers with lower wages and higher risk tend to receive more benefits in relative terms, in comparison with individuals with higher contributions.
Owing to its weight in total spending on cash benefits, far greater than in neigh­bouring countries, in Spain economic benefits that cover the risk of unemployment have a greater redistributive effect than average for the European Union. This greater relative expenditure and this stronger effect than in other countries can be explained by the persistence of much higher rates of unemployment than in other countries. Studies that analyse the redistributive effect of the various benefits coincide in pin­pointing unemployment benefit as the benefit with most effect on income distribu­tion after pensions. This effect increased moderately during the crisis, above all due to the greater relative weight of this type of transfer within household income in the case of unemployed people.

The last economic safety net, which exists in all European countries, is another lead­ing instrument for correcting inequality. Although there are different models, in all welfare states these benefits seek to mitigate the insufficiency of the financial resources of citizens with less income. They are fundamental for reducing poverty insofar as they affect, above all, lower-income households. In this respect, being by definition very progressive benefits, they can also be an important instrument for reducing inequality in the distribution of disposable income.

Although their ultimate goal is to reduce poverty, in recent years they have under­gone major transformations in an attempt to respond to other objectives. A large part of these changes have consisted in establishing more restrictive conditions of access and a growing emphasis on introducing measures intended to encourage the transition from benefit collection to labour force participation. This stressing of la­bour integration led to the succession of reforms in almost all high-income coun­tries, which generally speaking have reduced their contribution to the reduction of inequality.

The system of income guarantee benefits in Spain includes some features that are found nowhere else in the region. Unlike in most European countries, there is no last economic safety net as such that covers different segments and regions across the board. The current system is the sum of very diverse benefits that were intro­duced gradually with a variety of aims and purposes. The result is a complex mosaic of benefits that offer different levels of protection to individuals or households with similar needs depending on how they access the system, which moreover shows serious gaps in the protection of certain population groups. Levels of protection also differ widely depending on the region in which a given beneficiary household resides.

The amounts of the various benefits that make up this last safety net are also very small in comparison with the poverty threshold and fall far short of the European average. Problems in this respect became particularly evident during the economic crisis, with growing deficits in coverage as households exhausted the right to access to unemployment benefits.

In most European countries, family benefits play a significant role not only in child protection but also in the reduction of inequality and, above all, in the improvement of lower-income households. The most widespread model is that of universal ben­efits, usually funded through general taxation, although in some countries through social contributions. At present, only 11 EU countries do not possess some sort of universal benefits per child, basically southern European and some eastern Europe­an countries. It is these countries that have the worst indicators of economic vulner­ability for households with children.

Family benefits in Spain represent a major anomaly with regard to the model and the average amount in European countries (Graph 5). The child benefit paid by So­cial Security can be described as extraordinarily low in a comparative context. The ratio between the level of the benefit (€291 per annum up until 2018) and average income is the lowest in the 28 countries of the European Union. In 2008 the gov­ernment doubled the amount of child benefit for children under three years of age (from €291 to €500), but in June 2010 it was cut again to almost half. Similar cuts were made in some autonomous communities that had decided to implement their own systems of financial assistance to families. In 2019 the amount was increased from €291 to €341, still well below average EU levels.

All studies that have evaluated the redistributive impact of this type of expenditure show that its overall effect is clearly redistributive and greater than that of other social benefits in kind, with a very large impact on the 20% of the population with least income. Furthermore, this effect has increased over time, studies conducted at different times showing an  ongoing improvement, at least until the onset of the economic crisis. The few studies that have been conducted on the effect of health spending on income distribution since then show a reduction of the redistributive effect and the progressivity of health spending as a consequence of the drop in economic activity and the budget cuts this gave rise to.

Some studies have sought to identify which components of health spending are more progressive and which contribute more to reduce inequality. The most progressive items are those  corresponding most of all to primary care, and also emergency services. Up until the crisis, pharmaceutical spending was the most progressive item, but the legislative reforms that were introduced took a higher toll on low-income households.

Spending on education is the most important expenditure in reducing inequality of opportunities. The lack of educational mobility between generations is a manifestation of inequality that not only affects those who suffer it but also limits the improvement of productivity and the economic growth of a country. This loss of efficiency is added to the costs for a society of permanently concentrating income in a small segment of the population that benefits from the relational advantages associated with social status. Only with more investment in education and more effective allocation of this expenditure to the whole population is it possible to overcome the barriers raised by circumstances of origin.

Studies on the redistributive effect of educational spending in Spain confirm its redistributive nature (Graph 8). When this spending is allocated to households through different procedures the result is a greater improvement in lower-income than in higher-income households. Moreover, as in the case of health spending, this effect has improved in recent decades. The few studies that have been conducted since the beginning of the economic crisis do not seem to indicate that the downturn caused a clear reduction of this effect. However, not all spending is progressive; spending on charter schools, university education and scholarships and grants are not. Some significant problems affecting the system, such as early school leaving, are closely connected to inequalities of origin.

In all OECD countries the effect of taxes on income distribution is less than that of social benefits. There is no country in which the impact of taxes amounts to more than a third of that exerted by cash benefits. However, this is not to say that the fiscal side of public finance does not continue to play an important role in narrowing the income gap between households. Although tax systems have tended for the most part to simplify the different categories and fix lower rates, taxation – especially per­sonal income tax – still plays a leading role as an instrument for offsetting inequality. Comparative studies find that the redistributive effect of these taxes is determined more by their size (revenue) than by their progressivity. The common tendency to cut rates without losing progressivity would therefore explain the gradual loss of redistributive capacity of the tax.

In the case of Spain, all studies, without exception, confirm the inequality-reducing effect of personal income tax. Those studies that analyse the redistributive effect of taxes as a whole show that it is this tax that almost singlehandedly manages to re­duce the income gap among households. Simulations with EUROMOD tools reveal that it is the second instrument with most capacity to correct inequality, after con­tributive pensions, and that it achieves a reduction of the Gini index of more than 10 percentage points (Graph 9). 

In almost all EU countries, indirect taxes have gained importance in recent years within total revenue. This trend has been particularly intense in countries like Spain. In other European countries, even though the shift from direct to indirect taxes has not been so strong, there is still a clearly increasing trend in indirect taxation (Graph 10). Moreover, this trend has been endorsed by the European institutions through various documents and reports, and also by some researchers, who advocate a greater presence of indirect taxation as they consider it to be less negative for economic growth than the direct sort. It should also be borne in mind that in the face of the difficulty of increasing the tax burden, levies are increasingly imposed on those taxable items that are easiest to control, such as consumption, to which VAT is applied, and earned income, subject to personal income tax.

Studies that analyse the redistributive effects of VAT from a comparative perspective reveal its regressive nature when its impact is measured as a percentage of household income. These studies also confirm that the effect is proportional or even slightly progressive in some countries when it measured as a percentage of household expenditure. The effect on income is usually more significant, especially when the object of the analysis is the immediate impact of the tax, and also when considering the overall effect of taxation as a whole.

In the case of Spain, the late introduction of the tax in comparison with neighbour­ing countries has meant that estimates of the redistributive effects of VAT cover a relatively short period. The structure of the tax, however, has not been substantially modified in recent decades, albeit with certain changes in rates and in the lists of goods that are exempt or eligible for reduced rates. Studies that have analysed this impact confirm the existence of a clearly regressive effect on the income of Spanish households.

Reforms of this tax over the last decade have also attracted the attention of research­ers interested in quantifying its redistributive effect. In 2010 the standard rate was increased by two percentage points and the reduced rate by one point. Two years later both rates were raised again, the first by three percentage points and the sec­ond by two. Subsequently, in 2015, a different rate was applied to some goods. The studies that have evaluated the impact of these reforms show that in general they accentuated the regressivity of the tax.

Wealth taxes have been removed in almost all EU countries on the grounds that they are a form of over-taxation. In Spain, wealth tax was formally suspended in 2008 and then reinstated to varying degrees in some autonomous communities. Those studies that have estimated its redistributive effect find that the potential redistribu­tive capacity of the tax in the short term is limited, although it has a certain impact in the long term. This effect is hampered, in any event, by low levels of compliance and certain exemptions, such as those concerning family businesses, main residenc­es and combined income and wealth thresholds.

Inheritance tax contributes very little to total revenue, in most countries falling short of 0.5% of the GDP. Studies that have evaluated its redistributive impact in Spain show that that this tax helps to reduce inequality in the distribution of wealth, although very moderately. They also highlight the presence of consider­able equity problems in its functioning, such as the existence of excessive rates for certain forms of wealth, major regional inequalities and again problems of tax evasion and avoidance.

The purpose of excise taxes is seldom specifically to redistribute or indeed to raise revenue in any country, but rather to moderate consumption of certain goods. Com­parative studies confirm that these taxes are regressive. Studies focusing on Spain likewise confirm this finding.

1. Spain is one of the EU countries with most inequality in the distribution of household income. One of the main reasons for this is the lower redistributive capacity of the tax and benefit system.

2. Inequality has not decreased significantly in Spain for several decades. It failed to diminish during the long boom before the crisis, in spite of notable job creation. The indicators rose to very high levels during the crisis, and in the more recent period of recovery they have fallen very slowly.

3. Pensions are the instrument with the largest redistributive effect in the tax and benefit system as a whole. Furthermore, this effect has increased over time.

4. The redistributive impact of unemployment benefits is greater in Spain than in other countries, above all due to the persistence of much higher unemployment rates.

5. The redistributive capacity of the benefits that constitute the last economic safety net is severely limited, owing to problems of coverage of the vulnerable population, the small amounts paid, and inequalities between segments and regions.

6. Family benefits, which provide the lowest-intensity protection in the EU-28, have a very minor effect on income redistribution.

7. Health spending in Spain has a clearly redistributive effect, which has even increased in recent decades, although during the crisis the cuts made in some areas caused its progressivity to diminish.

8. The overall effect of spending on education in Spain is redistributive, although less so than that of health expenditure, and not all types of educational spending are progressive.

9. As in other high-income countries, the redistributive effect of taxation is significantly smaller than that of social benefits.

10. Income tax in Spain has a greater redistributive effect than that of other instruments of the tax and benefit system, with the exception of pensions. This effect has diminished over time.

11. VAT is a clearly regressive tax when its impact is measured in relation to household income. The reforms of the last decade have reinforced this feature.

12. Social contributions have a negative effect on income distribution, wealth taxes contribute little to redistribution, and excise taxes are regressive.