Redistribution and progressivity of the Italian personal income tax, 40 years later

Abstract

AbstractThe structure of the Italian personal income tax has undergone several important changes since its introduction in 1974, following a path similar to those in other advanced economies. These modifications have affected its redistributive impact in ways that a priori are not easily identifiable, since they have often moved in divergent directions. The aim of this paper is to study how the redistributive effect (i.e. the ability of the tax to reduce inequality in post‐tax incomes) and progressivity (i.e. the rate at which tax incidence increases with income) of the tax have changed, comparing its structure at the end of the 1970s with its current version. Contrary to what might be expected from the reduction in top marginal tax rates, after 40 years the Italian personal income tax is more redistributive and slightly more globally progressive. A simple decomposition enables one to appreciate the importance that policy choices, inflation and the evolution of income distribution have had in shaping its effects over time. The lack of automatic adjustment mechanisms to inflation has produced a strong monetary fiscal drag effect, dampening the progressivity of the tax and increasing its burden. Policy changes, however, managed to make the tax more redistributive, and not less progressive. Compared with 40 years ago, the incidence of the tax has decreased on lower incomes, while increasing on middle and high incomes.