Federica Lanterna - The erosion of the tax base and the loss of progressivity: evidence from the personal income tax in Italy

  • Presenting author: Federica Lanterna (Roma Tre University)

  • Authors: Lanterna Federica, Liberati Paolo

  • Session: A02B - Tax-Benefit - Monday 16:30-18:00 - Marietta-Blau Hall

  • Slides: PDF

Since the introduction of personal income tax (PIT), several exclusions of income sources from the income tax base have been observed in Italy. In some cases, income sources have been exempted; in others they have been subject to withholding taxation. As a consequence, the current PIT system is far from the original design of a comprehensive income tax (CIT). The aim of this paper is to quantify and assess the extent to which the various “escapes from progressivity” that have been implemented over time have contributed to reducing the redistributive effect of the PIT. Using a microsimulation model based on data from the Italian Household Budget Survey (Bank of Italy), the redistributive effect of a hypothetical income tax that is considered as close as possible to the definition of a CIT is compared with five tax systems that progressively consider the actual exclusions from the tax base occurred in Italy. In particular, the following are considered: i) the exclusion of government bonds and capital incomes; ii) the exclusion of the cadastral rent of the first dwelling; iii) the introduction of a withholding tax on rents from immovable properties; iv) the flat-rate scheme for the self-employed and individual entrepreneurs in its first version; v) the extension of the previous scheme in 2023. The results show how the redistributive effect of the tax has been progressively reduced compared to a comprehensive tax, especially for what concerns the disproportionality of the tax burden. From a normative point of view, exploiting the correspondence between income distribution rankings and the second-degree stochastic dominance, we will also show how the erosion of the tax base has given rise to income distributions that could not be unanimously approved by all increasing and concave social welfare functions (SWF). Thus, we will explore to what extent unanimous prescriptions could be obtained, if any, by introducing additional restrictions on the SWF.