Assessing Alternative IRPEF Reforms using Microsimulation Methods

Abstract

In the never-ending debate about reforms of Italian personal income taxation, radical reforms of the current taxation system based on changing the tax unit or reducing the progressivity of statutory tax rates often emerge. Recently the Study Commission on personal income tax and family income support published a White Paper (De Vincenti and Paladini 2008) suggesting a reform of current personal income tax (IRPEF) system within the IRPEF’s main framework based on an individual-unit tax system with progressive statutory tax rates. In this paper some alternative reforms of present Italian current personal income taxation will be studied using a microsimulation (MSM) model built on a representative sample of the Italian household population, holding as a benchmark for status quo comparisons the IRPEF paid on incomes earned in year 2007. The comparison will be performed discussing efficiency and equity of each system. Efficiency will be discussed looking at the effective marginal tax rates of taxpayers whose labour supply elasticity is typically the most elastic, namely married women, with and without children. Equity will be analysed by estimating some common equity, redistribution and progres