This working paper computes the marginal cost of public funds associated with the reform of the Spanish Personal Income Tax, in force since 1999. Departing from a partial equilibrium framework, we simulate the reform using the working population of the Spanish wave of the European Community Household Panel (ECHP).

Once the computation of the marginal cost of public funds and the use of microdata is justified in order to analyze tax policies, results conclude that this tax reform has enhanced significant welfare gains for a vast majority of households —mainly for low-income ones—, improving the efficiency of the labour market.