In times of high price increases, the debate arises about whether or not it is appropriate to adjust taxes to inflation –what is known as deflating–; specifically, in relation to taxes that have progressive rates, such as personal income tax.
The purpose of deflating the rates of this tax is to correct the greater proportional taxation of income, nominally updated due to inflation, by taking them to the personal income tax rates to determine the state and regional quotas, because the transition occurs in sections with higher rates, resulting in a higher average rate without this being caused by a higher real income.
A separate case, and which will deserve specific treatment, are the wage earners who, due to the delicate situation of the companies for which they work –and in response to the recommendations of numerous national and international organizations on the need to avoid the effects of a second round of inflation– they have not seen their salaries increase, but the price of food and energy has.
If only the first brackets are deflated, it is true that this will affect all income levels, but only the undesired tax effect of the nominal rise in income on taxpayers in the deflated brackets will be corrected, something that cannot be avoided when taking such a decision, since average incomes could be left out, which are precisely those that contribute the most revenue to the State.
Therefore, perhaps it would be convenient for the rates to multiply all their sections to adapt to the increase in income, applying the percentage of increase in wages, since income from work is the most important relative to the number of taxpayers and its amount. .
But the deflation of rates cannot solve the loss of purchasing power of income (wage, rental or business). Only, as we have said, can you avoid unfair cold progressivity. However, there are other personal income tax parameters that should necessarily be updated in accordance with inflation, such as the personal and family minimums –which aim to prevent the taxation of a minimum essential income–, as well as deductible expenses from work income, because These amounts have been directly impacted by inflation.
This last measure would be, above all, very useful to help mitigate the loss of purchasing power of citizens who have not had a rise in wages, but who suffer from the disproportionate rise in prices referred to at the beginning of this text.
We are facing a supply crisis, which the war in Ukraine has accentuated, especially affecting food and energy prices. Given this situation, the tax measures that have been exposed could help to improve a little the conditions of an important part of the population that has seen its economic capacity significantly reduced, so that, temporarily, it would seem reasonable to take into account the increase nominal rents and inflation; but the adaptation of our personal income tax to the new inflationary scenario is a decision that should be taken taking into account that, sooner or later, the public accounts deficit will have to be clamped, especially when it is foreseeable that the financing of the public debt will become more expensive by the stricter policy announced by the central banks.
Therefore, any fiscal initiative that is carried out to tackle inflation should be applied for a certain time horizon, and it would be advisable to launch an efficiency plan for public spending –which will continue to grow due to the increase in costs–, focusing spending on families, workers, companies and the most vulnerable sectors and moving towards a reduction in the public deficit, which will allow us to maintain reasonable levels of debt in the event that energy prices continue to be high for a longer period of time long than expected.
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