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Taxing income or consumption: macroeconomic and distributional effects for Italy

Details

Identification
JRC nr: JRC127016
Publication date
1 December 2021

Description

We study a set of tax reforms introducing a budget-neutral tax shift in Italy, from labour income to consumption taxes. To this end we use a microsimulation model to provide the output with which to estimate the parameters of tax functions in an overlapping-generations computable general equilibrium model. In doing so we make marginal and average tax rates bivariate non-linear functions of capital income and labour income. The methodology allows for the representation of the non-linearities of the tax and social benefit system and interactions between capital and labour incomes. The linked macro model then simulates labour supply, consumption and savings in a dynamic setting, thus accounting for behavioural and general equilibrium effects within a life-cycle optimization framework. Our simulations show that a tax shift made by cutting personal income tax rates might bring significant efficiency gains in Italy, with limited regressive effects, notwithstanding the revenue-compensating increase in consumptions taxes.

Authors:

D'ANDRIA Diego, DEBACKER Jason, EVANS Richard W., PYCROFT Jonathan, ZACHLOD-JELEC Magdalena

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jrc127016.pdf
English
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