Family size tax credits or allowances?A welfare comparison

Resumen

At present, Spain is undertaking a profound reform process in its personal income tax (IRPF, Impuesto sobre la Renta de las Personas Físicas). Maybe one of the most significant elements in the reform is the replacement of the current tax credit system, related to family size, by an allowance system. This paper makes a welfare comparison of both systems, following a social welfare function specification à la Atkinson and Bourguignon (1987). The exercise is done using the Panel of IRPF, which belongs to the Instituto de Estudios Fiscales, which consists of a sample of more than 250,000 tax returns, from 1979 to nowadays. Two main results are obtained. First, the use of tax credits entails a greater overall redistributive effect in personal income tax. Second, none of the alternatives can be assured to be welfare superior, nor can any of the systems when compared to an equalyield proportional income tax.