03.09.2018
Welcome address
Second Annual Research Conference of Banco de España
3 September 2018
Pablo Hernández de Cos
Governor

Good morning.
I would like to welcome you to the second Annual Research
Conference, which this year is jointly organised by Banco de
España and the Institute for Fiscal Studies.1
Let me start by thanking our colleagues from IFS. The IFS is
a benchmark for rigorous policy analysis, far-reaching
influence and frontier academic research, and it is indeed an
honour for us to collaborate with them.
This meeting has become our flagship research conference
with the main goal of bringing together leading scholars and
policy-makers to discuss frontier research on recent
economic developments and the policy options to address
them.
Last year the conference focused on macro, monetary and
macroprudential policies. This year we want to turn our
attention to tax and transfer systems.
After several years of sustained recovery, the Great
Recession has left a legacy of high public debt ratios, low
potential output growth and rising inequality in some
countries. For instance, the euro area aggregate public debt
stands at close to 90% of GDP, almost 25 percentage points
up on its pre-crisis level. Also, the IMF estimates that
potential output growth in the major advanced economies
has been declining since the early 2000s, this trend being
further aggravated by the global financial crisis. Currently,
potential output for this group of economies is thought to be
at around 1.5%, a significant drop from the 2% growth
estimated in the pre-crisis period.2 At the same time, the
percentage of wealth held by the richest 10% of the
population of the United States, France or the United
Kingdom has risen by between 5 pp and 9 pp in the last
25 years.3
Moreover, far-reaching transformations such as
globalisation, the digital revolution and demographic trends
are all shaping the world economy today, and will continue
to do so in the years to come.
Against this backdrop, tax and transfer systems can play a
crucial role in providing sound public finances, increasing
potential output and delivering sustainable and inclusive
growth. However, meeting these goals poses some
significant challenges. And not only because of the intrinsic
distortionary nature of taxation and the different existing
trade-offs among these three dimensions, but also because
some of these global phenomena, in particular globalisation
and the digital revolution, can adversely affect the capacity
of governments to collect taxes. As recently stressed in a
newspaper article, the challenge is to define a system where
taxes target rents, preserve incentives and are hard to
avoid.4
Let me highlight some avenues of research that I consider
relevant in this context.
First, the well-known equity-efficiency trade-off of taxation
has given rise to a fruitful literature on the mechanisms
driving the behavioural response of taxpayers and the size
of such reactions.5
While the initial focus of this literature relied on labour supply
responses6, some recent contributions have emphasised the
importance of accounting for additional mechanisms, such
as tax avoidance or rent-seeking activities by top earners.
For example, one such contribution finds that the incentive
to bargain for more compensation in an environment of low
top tax rates drives the bulk of the behavioural reaction of
top earners, while the reaction of the labour supply is
modest.7
For policymaking, it is crucial to know the direction and
extent of these behavioural reactions. On one hand,
because they inform the need for policy evaluation
frameworks that go beyond the simple estimation of
morning-after effects. On the other, because behavioural
responses are at the root of the optimal design of the tax
and transfer system. As a consequence, accounting for
them is central to addressing a host of current policy
debates, such as the optimal level of progressivity.
Second, one influential avenue of research has documented
a consistent trend of income concentration at the top of the
distribution in some OECD countries in the last few decades.
One explanation behind this pattern points to the concurrent
fall in top marginal rates, whereby some authors have
established a causal link. For example, it has been
documented that the top 1% income share in the US has
increased from around 8% in the early 1960s to 18% in
recent years, this trend having been accompanied by a
dramatic fall in the top marginal tax rate from 85% to 35%.8
Nonetheless, other economists suggest that skill-biased
technological change - by favouring top earners relative to
average earners - is at the root of this income concentration
pattern.9 This debate has by now reached the public arena.
Third, from a macro perspective, a growing segment of the
literature advocates a move from the standard new
Keynesian framework, based on representative agents, to
models that account for household and firm heterogeneity,
in order to better understand the transmission channels of
monetary and fiscal policy. This literature speaks directly to
central bankers, since it challenges some of the basic tenets
of our traditional understanding of monetary and fiscal
policy.
For example, a heterogeneous household framework is
crucial to assess the extent to which additional revenue can
be raised by making income taxes more progressive. In this
regard, a recent paper emphasizes that the revenue impact
of a more progressive tax schedule in the US should be
assessed in light of the reaction of agents along the income
distribution, and the aggregate changes triggered as a
result.10
And fourth, the emergence of the digital economy poses
significant challenges and opportunities for tax systems
around the globe. For instance, research for the US
suggests that profit-shifting to low-tax jurisdictions reduces
the tax bill of US-owned companies by about 20%.11 Thus,
globalisation and the growing reliance on intangible assets
demand new ideas to limit the erosion of corporate income
tax. In this situation, the international dimension of tax
design emerges at the forefront of the policy debate. Against
this backdrop, for instance, the OECD has launched a
welcome initiative, known as the Base Erosion and Profit
Shifting Project (BEPS), which brings together 115 countries
with the aim of ensuring that profits are taxed where the
economic activity takes place and where value is created.12
As you can see in the conference programme, we have an
excellent menu of papers covering a large amount of topics,
related to these and other issues. They will provide new and
valuable insights in the realm of fiscal policy, and will
therefore improve our understanding of this field, both from
a theoretical and an empirical perspective.
Why are all these questions relevant for central banks? In my
view, there are sound reasons to argue that the research
effort of a central bank need not necessarily be confined to
the traditional fields of macro and monetary policy. On the
contrary, the deeper and broader our understanding of the
economy is, the better we will be able to fulfil our task of
producing good analyses in monetary and financial matters.
In the particular case of tax and benefit systems, they have
sizable effects on investment, labour-force participation and
productivity, and hence on potential output growth and the
level of the natural rate of interest. In addition, apart from
potential discretionary decisions, tax and benefit systems
are the main ingredient of automatic fiscal stabilisers in
advanced economies. A deep understanding of tax and
benefit systems is therefore crucial to anticipate aggregate
demand and inflation dynamics and to assess the
appropriate stance of monetary policy and, more generally,
of the overall policy mix.
From the standpoint of Banco de España, the foregoing
arguments in favour of a wide view on our research activities
are even more compelling since our responsibilities include
providing advice to the Spanish government on economic
policies. In so doing, we have not remained indifferent to the
transformations referred to above and the avenues of
research inspired by them.
Consistent with this broad perspective on central bank
research, our economists engage in an extensive variety of
topics, some of which go beyond the more traditional focus
of central banks. For example, we have recently placed
emphasis on the study of the aggregate effects of structural
reforms in product and labour markets, the distributional
consequences of tax policies, the evolution of income
inequality and the assessment of the financial competences
of the population, to name but a few.
More generally, we believe that high-quality theoretical and
empirical analyses are necessary to fulfil one of our core
mandates: understanding and monitoring developments in
the euro area and Spanish economies. We see high-quality
research as an indispensable tool to adopt sound policy-
making decisions.
In this regard, in recent years Banco de España has aimed
to further improve the standard of its research activity and
to strengthen collaboration with other institutions. Overall,
these endeavours reaffirm our commitment to research, as
the fundamental basis for good policy decisions, and I hope
they will enhance our research output in the future.
I would not like to miss this opportunity to underline the
importance of relying on accurate and available statistics for
economic analysis and research. It is my view that allowing
independent researchers to access high-quality data is a
necessary step to advance in the knowledge of the issues
referred to above.
In this regard, over the years more and more countries are
easing the requirements to work with the micro and
administrative data produced by the public sector.13 I believe
that Spain should not lag behind in this endeavour.
In keeping with this assessment, Banco de España provides
researchers with the micro data of some of the surveys it
conducts, such as the Survey of Household Finances and
the Survey of Financial Competences. But more needs to be
done. In this regard, we are committed to extending the
availability of micro data to other products, such as the
balance sheet data of non-financial corporations and some
banking data. In this respect, Banco de España has recently
joined INEXDA, a network of central banks whose aim is to
exchange experiences in the management of granular data
in order to facilitate their use by external researchers.
Also, we must strive to have other public institutions join us
in this initiative. Although the Spanish public sector currently
provides samples of administrative data regarding, among
others, tax returns and social security records, there is
ample room for improvement in this area.
In this respect, enlarging the number of available datasets,
enabling access to the universe of observations and
allowing for the merger of different databases are measures
that would, for sure, deepen our understanding of the
Spanish economy and help design better public policies. In
this connection, the experience of the Nordic countries is a
success story, and could be used to guide our efforts in the
future.
Let me conclude.
Tax and transfer systems around the world face significant
challenges to provide inclusive growth and fund the public
policies that the population demands. Meetings such as this
conference provide an excellent opportunity to enhance our
understanding of these fascinating issues and to strengthen
the links between central bankers and academics.
Allow me to recall in this regard the figure of Sir James
Mirrlees, who has recently passed away. His
groundbreaking academic contributions and deep
involvement in public policy design provide an outstanding
example of intellectual achievement and commitment to
improving the society. He rightly gave his name to the
influential Mirrlees review, which has become an essential
guideline for policymakers involved in tax design. I would
like to convey my sympathy to our colleagues of the IFS,
who had the opportunity to work in close collaboration with
him, and to the academic community in general for this loss.
Finally, let me express my gratitude to the organisers for
making this conference possible and to all of you for
attending.
I wish you a very productive meeting and a pleasant stay in
Madrid.
Thank you very much for your attention.