A Decomposition of the Personal Income Tax Changes in Italy: 1995–2000

Abstract

The effects of personal income tax changes are usually analyzed by comparing the inequality of income distributions before and after the tax policy change on a fixed pretax income distribution. This constant-population methodology aims at isolating the redistributive effect of the tax legislation. On the basis of the OECD's 1987 analysis, this paper proposes a methodology to disentangle the pure effect of tax changes from the influence of other nontax factors when the pretax income distribution is not fixed. For the Italian case, it is shown that the additional redistributive outcome displayed by changes of tax laws between 1995 and 2000 is only one-fourth of the total change of the redistributive impact in the same period and is outweighed by the effect of inflationary fiscal drag.