What does the personal income tax with negative rates proposed by the PSOE mean? Advantages for low income and a big problem

A few days ago the PSOE exposed its ideas for a tax reform in a Framework Presentation, a document that will be debated in the 40th Congress of the party to be held in Valencia in October.

Among the proposed topics is the corporate tax reform to set a minimum effective rate or study new green taxes. But the highlight is the creation of negative rates in personal income tax.

What are negative rates?

Currently in personal income tax, all types are positive. That is, as long as we have income as a natural person, we will end up paying some taxes. If the salary is very low and / or the family circumstances are certain, it may be that in the income statement of the following year the total amount to be paid of personal income tax is zero and therefore the statement comes out to return.

But that the Treasury returns money to a person does not imply that there are negative rates. Implies that the rate once the declaration is made is lower than the rate that was in the withholding. But in no case is the type negative.

If the IRFP rate were negative, this implies that the Treasury would pay the taxpayer. That is, you would be receiving a grant and that the net salary would be higher than the gross salary, which is currently not the case.

Negative personal income tax, a good idea

This PSOE proposal is not new. In fact a few years ago Citizens proposed a salary supplement for the lowest incomes to stimulate the employability of workers with less training.

This salary supplement it was even signed in the 2017 Budget pact between PP and Citizens, but it was not implemented. And it was a good idea that came to nothing, like almost everything from that incomplete legislature.

Therefore this new salary supplement proposed by the PSOE, although now they call it negative personal income tax, is a good idea. It is a form of direct redistribution, without paperwork, that could reach those most in need without having to wait years to receive the help they need.

The great failure of the necessary Minimum Vital Income approved in 2020 is the time it takes to approve the aid, and an automatic mechanism, where the Treasury checks the data, necessarily expedites the aid process.

However, it has a big problem

Expediting the IMV through the Treasury, with zero paperwork and with all recipients receiving it is a very good idea. But it has a problem: since the income payer cannot apply negative rates to the withholding, the worker would have to present the income tax return to receive the income through the Treasury. And this implies that would receive the aid a year later.

On many occasions, a year late can be very important, you just have to see the desperate situation of many families because the IMV is not processed and was approved a year ago.

To compensate for this, a mechanism could be created for the advancement of personal income tax returns, as for example exists with the maternity or large family deduction. But it would already have to be the beneficiaries who request it and although the process could be very simple (it is so in the cases mentioned) there is a large literature that explains that when aid is not automatic there are people who are left out.

Another problem with this system without advance returns is that workers have to file income tax returns to receive their help, and they are workers who are not obliged to do so. Again, the lack of automation could reduce their efficiency and everything leads to the conclusion that these salary supplements should be implemented automatically.

Therefore, we are facing a good idea from the PSOE that would surely have more speed and acceptance than the current IMV mechanism, but that requires an implementation with automatisms so that its effectiveness is universal. Hopefully it comes to fruition.


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