A general equilibrium evaluation of tax policies in Spain during the great recession

Abstract

The main goal of the paper is to assess the effects of several permanent tax rate hikes implemented by the Spanish Government in 2009 and 2010 to counteract the rapid increase of the public deficit and debt registered in 2009-10. It uses a numerical general equilibrium model calibrated to a social accounting matrix elaborated by the authors for the year 2000. The effects of increases in excise, value added and personal income taxes are simulated separately and jointly. The results indicate that the extra revenues obtained from each tax figure are lower than the ex-ante calculations estimated by the Government. Moreover, the reductions in the public deficit accomplished are considerably smaller due to general equilibrium effects such as lower production levels, greater unemployment rates and higher prices and transfers paid by the Government. The joint results indicate the enormous difficulties the Government faces to close the deficit gap by raising taxes.