Italian Personal Income Tax Research Articles

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

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.

The bright side of pessimism: Promoting wealth redistribution under (felt) economic hardship.

Economic inequality is a collective issue that affects all citizens. However, people often fail to support redistribution strategies aimed at redressing inequality. In this work we investigated personal optimism and collective pessimism as psychological processes that contribute to hampering vs. promoting the demand for redistribution. Our prediction was that support for redistribution would require both a pessimistic economic outlook at the collective level and the perception of being economically disadvantaged. In two studies, one of which pre-registered, Italian participants (Study 1: N = 306; Study 2: N = 384) were led to feel relatively poor or rich, rated their perceived control over either their personal or the nation's future and estimated either personal or national economic and general future risks. To measure support for redistribution, participants were invited to allocate their desired level of taxation to each of the five tax brackets included in the Italian personal income tax. Results showed that participants were optimistic about their personal future, but pessimistic about the fate of their nation. This difference was explained by respondents' greater perceived control over personal future than over the nation's future. Importantly, greater pessimism about national economic risks led to greater support for progressive taxation only for participants who felt relatively poor.

Do Details Matter? An Analysis of Italian Personal Income Tax

Do the details of the structure of the tax code matter? Which of the elementary components of a modern and complex tax code is most important for households? This paper explores these issues within the framework of an overlapping generation model with heterogeneous agents and with specific reference to the case of Italy. Risk averse agents in the model are exposed to lifespan uncertainty, borrowing constraints, and uninsurable wage shocks. In this framework, the tax code plays an important role as a source of publicly-provided insurance against unlucky realizations of incomes. In particular, while many features of the tax code are instrumental in shaping its ability to redistribute income across agents, this paper finds that a new-born agent would attach a significant welfare value to the existing tax credit for employees’ earned income. This provision of Italian personal income tax significantly lowers the tax burdens on agents hit by negative productivity shocks and thus plays a crucial role in limiting the dispersion of realized net incomes and consumption.

Quantifying the Redistributive Effect of the Erosion of the Italian Personal Income Tax Base: A Microsimulation Exercise

In recent years several sources of income have been excluded from the Italian Personal Income Tax (PIT) base and subject to alternative proportional systems or totally exempt from taxation. These changes have contributed to making PIT even more selective, accentuating vertical equity issues that have accompanied it since it was introduced in 1974. The aim of this paper is to calculate the redistributive effect following the erosion of the PIT base and the contribution of this phenomenon in determing the redistributive power of the Italian tax system, as well as the distribution of the fiscal benefits and burdens by deciles of income under the alternative tax rules considered. Using a static microsimulation model, the paper compares various versions of the tax system within a counterfactual logic: on the one hand, the existing legislation as of 2014 consisting of PIT and those incomes subject to substitute taxes or tax-free in this study; on the other hand, an hypothetical legislation which takes as a reference point the Comprehensive Income Tax (CIT) scheme and includes in its base all incomes replicated. The results demonstrate that the erosion of the PIT base has reduced the redistributive effect and the progressive nature of the Italian tax system.

A note on the maximum value of the Kakwani index

The Kakwani index computes the departure from proportionality of a progressive income tax by measuring the difference between the concentration coefficient for tax liabilities and the Gini coefficient for pre-tax incomes. In case of maximum progression, that is a situation in which only one taxpayer faces the overall tax burden, the index reaches its theoretical maximum value, given by 1 minus the Gini coefficient for pre-tax incomes. We argue that this phenomenon can happen in one special case that is not satisfied in real-world personal income taxes. As a matter of fact, the overall tax revenue of a real-world personal income tax cannot be eventually paid only by the richest taxpayer. Therefore, the maximum concentration coefficient for taxes cannot be equal to 1, and, consequently, the maximum value of the Kakwani index cannot be 1 minus the Gini coefficient for pre-tax incomes, as generally described in the related literature. According to different hypotheses, we give evidence of this phenomenon by employing the Italian personal income tax.

The contribution of tax statistics for analysing regional income disparities in Italy

The study of income inequality within countries is becoming of particular importance, also in the light of the spatial effects of the Great Recession. This paper uses newly available tax record data on the Italian case for providing novel evidence on regional income disparities in this country. Three main objectives are achieved. Income disparities in Italy are characterized by within- and across- regional patterns. Specific dimensions of analysis such as gender, age class, and households’ composition provide additional insights on inequalities in this country. The place-specific effects of the Italian personal income tax and its main elements are quantified and interpreted. Specifically, the redistributive capacity of tax schedules and tax expenditures across and within regions is investigated. In addition, the potential original role of using tax files for studying inequality issues in Italy as in other countries is discussed. The final sections summarises and presents some possible future avenues of research.

What Explains the Redistribution Achieved by the Italian Personal Income Tax? Evidence from Administrative Data

We analyze the Italian personal income tax (PIT) in the light of the different tools available to the government to achieve income redistribution. We focus in particular on three mechanisms: marginal tax rates, deductions, and tax credits. Exploiting an extended version of the standard Pfähler decomposition, we estimate the contribution of each of these three tools to the overall redistributive effect of the PIT using administrative data on more than 1.3 million individual tax returns. Our estimates suggest that more than half of the total PIT redistributive effect is due to the two most important tax credits (the tax credit for employment and the tax credit for retirement income), while the marginal rates schedule contribution is about 40 percent. On the contrary, most of the itemized expenditures do not show any sizable impact on redistribution.

Accounting for Tax Evasion Profiles and Tax Expenditures in Microsimulation Modelling. The BETAMOD Model for Personal Income Taxes in Italy

The paper presents the main characteristics of BETAMOD, a static microsimulation model that reproduces the Italian personal income tax (IRPEF), as well as local income taxes, namely the regional and municipal additional income taxes, building on a detailed reconstruction of tax legislation. With respect to the vast majority of existing tax microsimulation models, the peculiarities of BETAMOD concern two aspects: the inclusion of a detailed set of tax expenditures, and the estimation of individual-specific tax evasion rates, which account for the total individual income level, its composition in terms of income sources, and the geographical area of residence.

Accounting for Tax Evasion Profiles and Tax Expenditures in Microsimulation Modelling. The BETAMOD Model for Personal Income Taxes in Italy

The paper presents the main characteristics of BETAMOD, a static microsimulation model that reproduces the Italian personal income tax (IRPEF), as well as local income taxes, namely the regional and municipal additional income taxes, building on a detailed reconstruction of tax legislation. With respect to the vast majority of existing tax microsimulation models, the peculiarities of BETAMOD concern two aspects: the inclusion of a detailed set of tax expenditures, and the estimation of individual-specific tax evasion rates, which account for the total individual income level, its composition in terms of income sources, and the geographical area of residence.

On measuring violations of the progressive principle in income tax systems

Kakwani and Lambert (Eur J Polit Econ 14(2):369–380, 1998) state three axioms which should be respected by an equitable tax system. Using the Atkinson–Plotnick–Kakwani re-ranking indexes of taxes, tax rates, and post-tax incomes, calculated with respect to the ranking of pre-tax income distribution, they then propose a measurement system to evaluate the negative influences that axiom violations exert on the redistributive effect of taxes. In this paper, we reconsider the way Kakwani and Lambert measure violations of their second axiom, which concerns the re-ranking of tax rates. We construct a non-negative index which is strictly faithful to Kakwani and Lambert’s commands; we show that the Authors’ measure does not exactly fit the statements made in their second axiom. Both Kakwani and Lambert’s original measurement system and the modified one are then applied to Italian personal income tax in 2008. According to the modified measurement system, the average tax rate seems to play a smaller role than that suggested by the results gained using Kakwani and Lambert’s original methodology.

Redistribution, Vertical Equity and Welfare: An Application to Italian Data

In order to illustrate the redistributional effects of income tax reforms this study proposes an application by considering distributional differences before undertaking comparisons between tax schedules. It compares results of two approaches based on microlevel data, the well-known Lorenz dominance criterion and the “transplant-and-compare” procedure of Dardanoni and Lambert (2002; J. Public Econ. 86:99–122). Both approaches are applied to Italian micro-data data for 1995-2000 and empirical evidence and questions arising from the implementation of these methodologies are presented and discussed. Some of the main findings are that Italian personal income tax reforms were able to preserve the degree of redistribution.

Complexity of Personal Income Tax Design: An Index of Measurement

This article puts forward an index of complexity of personal income tax design. Deductions and tax exemptions, etc., are often linked to legal tax brackets in order to increase fairness in the distribution of tax burden. But increased fairness tends to make the tax structure less comprehensible to the non-perfectly informed taxpayer. The proposed index gives a quantitative measurement of the distortion between legal and effective tax rates along the gross income scale and allows for intertemporal and interspatial comparisons. An application of the index to Italian personal income tax concludes the article.

Tax Complexity with Heterogeneous Voters

In democratic countries tax systems are complex and elaborated. the issue of tax complexity is a crucial one in the policy debate about tax design and reforms. A recent trend towards simplification has emerged, at least in developed countries. We argue that tax complexity is the result of the interplay between economic and political factors, and we assess the observed trends and the main features of tax complexity under this perspective. Italy represents an interesting case: changes in the structure of the personal income tax in the period 1974–2005 are meant to reduce tax complexity. Data on the Italian personal income tax suggest the existence of a trade-off in the determination of tax complexity: on one side more complexity is beneficial for a heterogeneous population, since it allows a design closer to individuals’ preferences, while on the other side it is costly. We explore the emergence of this trade-off in a voting model. Median voter models are not able to appropriately capture the multidimensional nature of the determination of tax complexity. A simple probabilistic voting model instead delivers interesting results. We find that, when grouping individuals with different income levels in the same income bracket, on one side the political support by individuals, who necessarily will pay a tax rate different from their preferred one, is reduced, while on the other side the administrative cost of taxation is also reduced.

Grossing-Up and Validation Issues in an Italian Tax-Benefit Microsimulation Model

The aim of this paper is to give a detailed description of TABEITA, the tax-benefit Micro Simulation Model (MSM) developed and maintained at Econpubblica (Center for Research on the Public Sector, Bocconi University) for the analysis of the redistributive impact of the Italian Personal Income Tax. After a brief general introduction on the scope and main features of MSMs, all the main characteristics of TABEITA are discussed. Particular emphasis is posed on issues that are crucial for the reliability of a MSM: the grossing-up procedure and the validation of model outputs. A sample simulation of the 2004 and 2005 PIT reforms are reported in order to show one of the possible applications of the MSM. A concise guide for TABEITA users is provided in the appendix.

Analysing Tax–Benefit Reforms Using Non‐Parametric Methods*

AbstractStatic tax–benefit microsimulation models (MSMs) are widely used and well‐regarded tools for public policy analysis, but it is essential to use them very carefully. This paper focuses on the analysis of MSM output, suggesting the use of non‐parametric methods as a useful, informative and relatively straightforward complement to detect effects not always captured by measures often used to present MSM results.Non‐parametric methods are used here to analyse the output of an MSM applied to the 1998 Italian personal income tax reform, the main change in which concerned the tax schedule: the first tax rate was increased from 10 per cent to 18.5 per cent and the top one was reduced by 4.5 percentage points. Non‐parametric methods highlight that the effects of this reform were very different for different types of households, with low‐income pensioner households among the main losers. Results are checked for robustness by standard statistical methods and compared with empirical results obtainable using quintile histograms.

Redistribution and Welfare: One Simulation of the Real Effects of the Reform of the IRPEF (Redistribuzione e Welfare: Una Simulazione degli Effetti Reali della Riforma dell'IRPEF)

Empirical researchers are used to fix a common distribution of income before tax for all tax schedules being compared. Is this realistic for accurate intertemporal, or international, comparisons when, as a matter of fact, schedules operate on different original income distributions? It is well-known that what matters for the distributional impact of personal income taxation is the tax schedule and where the taxpayers are located. On this, Dardanoni and Lambert (2002) were able to formulate what could be a strategy a practitioner needs to perform if she or he wishes to take pre-tax inequality into account and to draw out correct and actual distributional implications of tax reforms. To summarise, their procedure acts on the pre- and post-tax distributions under analysis: it looks for an isoelastic transformation between the former and, if this were the case, corrects for the pre-tax distributional differences between the latter. Standard results on redistribution of Jakobsson and Kakwani are preserved under specific conditions on the structure of pre-tax income distributions and it achieves an 'independence of baseline' property. Critically, in Russo (2005) I proposed an application to Italian micro-data and personal income tax systems (IRPEF) between 1995 and 2000 and, according to Dardanoni and Lambert's requirements, I found that before-tax log distributions differ essentially by location and scale. In this new paper I focus on an interesting insight. If isoelasticity does hold between pre-tax income distributions through time, it seems reasonable enough to conclude that this will occur again. As a consequence, with some parameters, say a and b, reflecting size and inequality differences there should exist some isoelastic transformation able to transplant an unknown pre-tax income distribution into an already known one. According to this hypothesis an empirical researcher wishing to assess, now, which may be the outcomes of a tax reform, could proceed in two stages. Firstly, as usual, she or he can simulate those outcomes by using the most recent available distribution of pre-tax income. Secondly, in addition, she or he could take into account distributional differences by assuming different values for the parameters a and b. In this way, we may control for a range of potential distributional variations: the choice of parameter values is the 'variable' which could influence, together with the new tax structure, the redistributive effect. I propose the 2005 Italian personal income tax reform as a good candidate for this more comprehensive approach and, in particular, I focus on the second stage. As far as I know, following this method tax systems intertemporal comparisons have not been treated elsewhere before. I present and discuss empirical evidence arising from the methodology and the main 'potential' pure redistributive results with regard to the 2005 IRPEF reform versus the 2000 IRPEF.

Italian Personal Income Tax Reform, Inequality and Welfare: IRE Redistributive Effects

This paper presents some methods to redistribute the gains (or losses) of a tax reform and a procedure to identify the value judgements according to the tax reform outcome. They are useful to analyse the original proposal of personal income tax (IRPEF) reform presented in Italy by the current Executive on 21 December 2001. The principal outcome will show that 'the redistribution continues to go from the richer group to the poorer, but with a reduction of intensity'.