2. Personal Income Tax

Income from income tax reached 87,972 million in 2020, 1.2 more than in 2019. Behind this growth in such a negative environment are, on the one hand, the different mechanisms to support activity (ERTE, aid to self-employed workers) that made it possible to mitigate job losses and, on the other, the increase in withholdings in the public sector, both for salaries and pensions. In addition, the tax in 2020 was favoured when compared to 2019, when most of the refunds were made as a result of the ruling that declared maternity benefits exempt. Together, these and other measures contributed almost €1.1 billion to increased revenue (without them, revenue growth would have been reduced to zero). Other items also had good data, such as the result of the annual declaration and, although with a marginal contribution, the withholdings by investment funds. In the rest of the income (withholdings from work in the private sector, fractional payments from personal companies, withholdings from income from movable capital and from leases) the decrease was a reflection of the general situation.

Household income, which is the basis for the tax, decreased by 0.9 in 2020. The most important incomes, those from work (wages, pensions, unemployment benefits), increased by 1.3% thanks to the boost from public salaries, pensions and unemployment benefits (including payments linked to ERTE). However, other incomes (capital and business activities) fell sharply, showing the impact of the situation from the first moments of confinement; For the year as a whole, capital income fell by 15.5% and business income by 10.7%.

Labor income grew by 1.3% in 2020, although the performance was very different depending on whether it came from private salaries, public salaries or pensions. Private sector wages suffered from all the problems arising from the lockdown and the decline in activity. The drop was 5.8%, more pronounced in SMEs (-10.3%), with greater representation in activities most affected by restrictions, than in Large Companies (-2.2%). Chart 2.1 illustrates the difference in the evolution of the different productive branches in 2020. The graph shows the variation in the wage bill in large companies and corporate SMEs in the main activities (the series can be downloaded from this link ). As can be seen, the most damaged are those characterized by a smaller business size, particularly the hotel and catering industry.

Part of this reduction in the wage bill that occurred in the private sector was covered by the ERTE (the Public Employment Service -SEPE- was responsible for covering a fraction of the wages that companies stopped paying). If the amounts transferred by the SEPE are added to private sector salaries, the drop in the wage bill would be reduced to around 2%. Chart 2.2 shows the cushioning effect that unemployment benefits had, including aid from ERTE (the data can be found in Table 2.2 and in this link ).

In the public sector, wages grew by 5.9% in the year, slightly more than in 2019 (5.6%). The greatest growth occurred in the autonomous communities. (7.1%), especially in the second half of the year and concentrated in health and education. In the other administrations, growth was more moderate (5.3% in the Central Administration and 2.5% in the CC.LL.), although an upturn was also observed in the final stretch of the year; In the case of the Central Administration, as a result of the latest increases arising from the salary equalisation process in the security forces. Chart 2.3 shows the quarterly evolution of the wage bill in the three administrations (this link contains detailed information).

Finally, the pension fund grew by 2.9%. The figure was lower than in the two previous years (5% in 2018 and 4.2% in 2019) when there were higher than usual increases in pensions, those approved in the 2018 Budget that came into force in July of that year. Chart 2.4 summarises the evolution of the pension mass, differentiating the increase due to the rise in the average pension (2.4% in 2020) and that due to the increase in the pensioner population (0.5%).

Household capital income (furniture, rents and capital gains) decreased by 15.5% (Tables 2.1, 2.4, 2.5 and 2.6). These incomes suffered from the shock caused by the halt in activity from the very beginning. Although irregularly, capital income had grown by 3.8% in 2019 and had already contracted by 4.2% in the first quarter. After the second quarter low, losses moderated. Neither the intensity of the fall nor the trajectory were the same for each of the three types of income. In the case of capital goods (-23.9% in the year) the impact was significant in the first quarter and in the second quarter income was almost half that of a year earlier, although part of this sharp decline was due to the transfer of profit distributions by some companies between quarters. The decisions regarding the distribution of dividends were the main cause of the very negative evolution of these incomes. Only at the end of the year, and thanks to the advance payment of some remunerations to avoid the effect of the rise in rates on the savings basis from January 1, 2021, and due to the existence of extraordinary operations in the capitalization of insurance, was the fall substantially reduced. In leasing, losses are estimated at 9.6%. These incomes were the most directly affected by the closures and the decline in activity, which was reflected in the sharp contraction in the second quarter (-23%), which gave way to more moderate but stable declines of around 9%. Finally, capital gains, which fell by 15% over the year, suffered losses of over 20% in the central part of the year, recovering to a fall of 11.6% in the last quarter. It should be noted that these incomes come largely from the sale of real estate, an activity that was greatly affected throughout the year by the health and economic situation. Profits from investment funds, on the other hand, performed very well, with growth of 14.3% in the year, which reached almost 40% in the final quarter.

Household income linked to personal business profits fell by 10.7%. It is important to remember that these companies have a significant impact on the sectors most affected by confinement and the limitations on mobility and meetings (around 50% of personal companies in non-agricultural sectors are dedicated to commerce, hospitality and personal and leisure services). This had a strong impact in the first fifteen days of confinement in the first quarter (-8.3%) and, of course, in the second (-24.8%), with the fall stabilising in the second half of the year at around 5%.

The effective rate on gross household income increased by 1.1% (Table 2.1 and Chart 2.5). The increase was more a consequence of significant changes in the internal composition of the tax than of regulatory measures; These did not significantly modify the tax accrued and, when they did, it was negatively. This fact is clearly seen in the withholdings on income from work and economic activities. The effective rate only grew a few tenths (0.4%; Table 2.3 and Graph 2.6; The evolution of the rate by salary range since 2001 can be found at this link), but, if the detail is analysed, high variations in the rate can be observed: 4% in salaries and 2.2% in pensions. In the first case, it was the result, on the one hand, of the increase in the rate of salaries of the AA.PP. and, on the other hand, the greater impact that the loss of activity had on sectors with lower average wage levels and rates. This fact, which is clearly seen when distinguishing between Large Companies (with a 1.9% increase in the rate) and SMEs (+6.2%), hid the lower withholdings that occurred due to the fall in the payroll itself and because no withholdings were made on part of it (the one paid by the SEPE). In the case of pensions, the increase in the rate (+2.2%) contrasts with the two previous years with moderate increases due to the greater growth that occurred in the lowest pensions, but was in the order of the increases recorded before 2018.

The result of the fall in the bases and the rise in the effective rate was a accrued IRPF practically equal to that recorded in 2019 (+0.1%; Table 2.1). Without the differential rate estimate, the tax would be 0.6% lower than the previous year. As stated, in terms of accrual, the regulatory changes (Table 1.5) had little impact, being reduced to the lower tax accrued by the measures directed at entrepreneurs in modules and by the increase in the threshold for lottery tax.

Withholdings on income from work and economic activities grew by 1%, above the 0.6% of income due, as seen, to the increase in the effective rate (Table 2.3 and Chart 2.6). The growth is the same as that observed in salaries, although with a clear distinction between private (-1.8%) and public (8.1%). The slight reduction in the private sector is striking, which is explained by the aforementioned increase in the effective rate or, seen from another perspective, because the loss of wage mass occurred in the activities and employment categories that, due to their salary level, contribute less to the total withholdings. In the public sector, however, the expansion of the wage bill was accompanied by an increase in the rate, which made growth in 2020 even greater than that experienced in 2019 (6.6%). The same happened with pensions (5.1% in 2020 and 4.9% in 2019).

Capital withholdings decreased by 18.1% in 2020. It should be remembered that, in this case, where the withholding rates are fixed, the divergence with the evolution of income occurs because not all of them are subject to withholding. For this reason, withholdings on leases fell more than rents (-12.1% vs. -9.6%; The impact of the crisis on premises, whose rents are mainly those subject to withholding, is expected to be greater than on other leases), and on the contrary, on withholdings from capital gains in investment funds, which, as noted, had a positive performance in the year (14.3% compared to the -15% estimated for all of these gains). In the case of withholdings on personal capital, most of which are subject to tax, the fall was the same as that of income (-23.9%).

As for split payments, they decreased by 13.3%. These payments were affected by the regulatory measures, specifically those that allowed entrepreneurs in objective estimation to either adapt their earnings (eliminating the days in a state of emergency from the earnings calculation and, in the fourth quarter, applying a general reduction of 20% and a special reduction of 35% for the activities with the most problems due to the health crisis), or to switch to direct estimation if this was more favourable to them. Its impact is estimated at 87 million. Royal Decree-Law 35/2020 consolidated these measures in the tax rate.

Income from personal income tax grew by % in 2020, which was 1,079 million more than in 2019. The increase in revenue is similar to the amount contributed by the regulatory and management changes (1,088 million), so that, without them, revenue growth would have been reduced to zero.

Most of these regulatory changes were inherited from previous years (Table 1.5). The biggest impact was derived from the refunds for maternity benefits that were made, mainly, in 2019, but other measures (extension of family deductions, taxation of lotteries) also came from regulations approved before. Together, these measures amount to a net sum of 1.286 billion. In contrast, the measures approved in 2020 to facilitate compliance with tax obligations and reduce the tax on entrepreneurs in objective estimation reduced revenue by 198 million (132 million from deferrals and suspension of deadlines and 66 million from the reduction of fractional payments).

The growth in revenue was based on withholdings on income from work and economic activities, which grew by 1.5%, with a development, as seen when analysing income and accrued tax, very uneven in the public and private sectors.

Income from labor withholdings in the private sector decreased by 0.8%. This figure includes the amounts from deferrals granted in the first months of the pandemic and which were recovered throughout the year (other income in Table 2.3). The drop was not large compared to that observed in activity due to the impact of the ERTE on employment (workers remained in the company, although part of their salary was covered by the SEPE) and the increase in the effective rate of wages (due to the greater impact of the crisis in sectors of activity with low salary levels). This different impact of the crisis on the different productive sectors helps to explain the disparity between the slight increase in income from withholdings recorded in large companies (0.8%) and the 4.1% decline observed in SMEs (including other income). In the PP.AA. withholding tax revenues increased by 7%. The behavior was similar to that of these incomes in 2019 (growth then was 6.5%) and this can be said for both salaries and pensions. In the first case, there was an increase in the last part of the year due to the increase in withholdings from health and education, and due to the payment of the third tranche of salary adjustments in the security forces. The final growth in 2020 of withholdings from public salaries was over 7%, with an increase of over 5% in the wage bill and the rest due to the rise in the average rate. In pensions, withholdings grew by around 6.5%, a slightly higher increase than in 2019 and with a different distribution: The average pension rose less (in 2020 there were no increases as in 2018 and 2019) and the effective rate rose much more (3.5% compared to 2019 when it barely grew because the lowest pensions benefited from greater increases), even offsetting the lower growth in the number of pensioners (0.5%, 1.2% in 2019).

The annual declaration, not affected by COVID as it was the liquidation of the 2019 financial year, also contributed to the growth of the tax. Specifically, the net results of the annual declaration increased by 1,366 million, although more than 1,100 were due to the higher extraordinary refunds for maternity benefits made in 2019. In any case, the campaign was positive, with gross income increasing by 4.5%, even though the income that is normally behind this income (business and capital gains not subject to withholdings or split payments) did not increase substantially in 2019 (as you may recall, in 2018 they had reached a very high level, especially profits). Regarding the returns (Table 2.9), eliminating the other returns, which include the extraordinary ones for maternity benefits, the growth was 2.6%. The campaign took place without incident, with a pace of implementation similar to that of recent years. The only thing worth noting is the decrease in family deductions received in advance due to lower deductions for mothers with children under 3 years of age who work outside the home. This deduction, in its advance form, has been decreasing since 2011, more intensely in times of loss or less job creation, but in recent years this decrease has not been transferred to the total of advance deductions because since 2015 other categories have been added (large families, disability). In 2020, the latter no longer grew at the high rates of the first years and, consequently, the total decreased significantly (in 2019 they had already done so, but by barely 3 million).

In the rest of the tax revenues, only the withholdings on profits from investment funds improved compared to the previous year. The year began with strong growth that was cut short in the first months of the state of alarm; After the summer, the previous trend was resumed until the end of the year with increases of more than 50%. For the year as a whole, revenue increased by 11.6%. In other concepts the situation was the opposite. Withholdings on capital gains fell by 20%, with negative rates since March. The declines observed in rental withholdings (-7.4%) and in instalment payments (-10%) were due to the weakness of activity, although in the latter case also to the reduction in income induced by the measures approved in favour of small businesses.

Finally, it should also be noted that 121 million were lost in the 2020 collection due to the early settlement of the Allocation to the Catholic Church (Table 2.1 and 7.2). This settlement normally occurs in the first months of the following year (in this case it should have been in 2021), but in 2020 it was brought forward to December. The last time something similar happened was in 2011 (more information in this link ).