The 2007 Personal Income Tax Reform in Italy: Effects on Potential Equity, Horizontal Inequity and Re-ranking
AbstractAccording to Kakwani and Lambert (1998), an equitable income tax should respect three axioms related to each taxpayer’s tax liability, average tax rate and post-tax income: whenever taxation determines unequal tax treatments among equals or modifies pre-tax ordering, it influences the potential vertical effect of the tax through three types of inequity. Following the authors’ measurement system, we investigate changes in axiom violations due to the 2007 Italian personal income tax reform, that introduced significant changes in the tax structure. Our microsimulation model uses as input data those provided by the Bank of Italy in its Survey on Households Income and Wealth in the year 2006; estimates of the distribution of taxpayers are very close to the Ministry of Finance official statistics. The analysis considers both the individual and equivalent household gross income distribution and evaluates the decomposition with and without surtaxes. Main findings suggest that both in the 2006 and 2007 tax system most of the overall violations concern the axiom demanding the average tax rate to be a non decreasing function with respect to the gross income; the axiom requiring richer taxpayers to pay higher tax liabilities than poorer ones and the axiom requiring the tax to do not introduce re-rankings in the pre-tax income order present minor violations. The 2007 reform enhances both the potential redistributive effect, that is the one that could be obtained without axiom violations, and the axiom violations: the net result is a small positive variation of the actual redistributive effect. These phenomena appear more relevant for taxpayers than those for equivalent households. For what concerns taxpayers, the 2007 reform has modified also the composition of the three axiom violations, that remains almost the same whenever equivalent households are considered. Finally, focusing on each decile of the income distribution, regressivities are concentrated in the bottom five deciles of the income distribution both for taxpayers and equivalent households.
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Bibliographic InfoPaper provided by Former Department of Economics and Public Finance "G. Prato", University of Torino in its series Working papers with number 14.
Length: 20 pages
Date of creation: Jun 2010
Date of revision:
Personal Income Tax; Redistributive Effect; Horizontal Inequity; Reranking; Microsimulation Models;
Find related papers by JEL classification:
- C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-07-03 (Accounting & Auditing)
- NEP-ALL-2010-07-03 (All new papers)
- NEP-PBE-2010-07-03 (Public Economics)
- NEP-PUB-2010-07-03 (Public Finance)
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- Simone Pellegrino & Massimiliano Piacenza & Gilberto Turati, 2011. "Assessing the Distributional Effects of Housing Taxation in Italy: From the Actual Tax Code to Imputed Rent," CESifo Working Paper Series 3368, CESifo Group Munich.
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