Fiscal drag with microsimulation: Evidence from Spanish tax records

Abstract

Fiscal drag arises when nominal tax parameters remain unchanged despite nominal income growth, thereby increasing effective tax rates and revenue. We use Spanish administrative tax records and a detailed microsimulation model to examine fiscal drag in personal income taxation through two complementary approaches. First, we estimate tax-to-base elasticities to assess the progressivity of the tax system and potential fiscal drag under homogeneous income growth. We uncover significant heterogeneity in elasticities across income sources, across the individual income distribution and in the underlying mechanisms. Second, we conduct counterfactual simulations to quantify the actual impact of fiscal drag from 2019 to 2023, finding it accounts for about a third of revenue growth. Our findings offer insights for public finance modelling, revenue forecasting, and tax policy design.