Reforming the Personal Income Tax and the Family Allowance in Italy: a Proposal

Abstract

We illustrate a proposal to reform the personal income tax and the family allowance in Italy which aims at attaining a fair tax treatment of the family, laying emphasis on the redistributive processes in favour of large and poor households. Our proposal is based on a simplification of the tax rate schedule (with a reduction of income brackets) and a new design of the tax credits for dependents which implies the fiscal exemption of a sort of basic income, which is decreasing as the income of the household increases. The new scheme of supplementary tax credits for dependents, related to family income thresholds, would match the need to keep into account the economic conditions of the household with the need to avoid the abandonment of the definition of ability to pay on individual basis. The proposal also aims at attaining a closer integration between the personal income taxation and the family allowance, with a sizable revaluation of the amount of family allowances and its extension to self-employee. The distributional analysis, using the tax-benefit model DIRIMOD, shows a slight revenue loss and a significant increase, with respect to the 1995 system, in both the progressivity and the redistributive impact of the income tax. The distributional effects are even stronger if we keep into consideration the reformed system of family allowances.