Welfare and equity impact of consumption tax policies: A micro-macro-economic approach applied to Italy

This paper develops a micro-macro modelling approach to evaluate the impact of tax policies on economic growth and equity. The empirical framework benefits from the availability of micro administrative data and incorporates household- and sector- heterogeneity, detailed information on the tax system, and tax evasion features. The application of the integrated model to a uniform consumption tax rate reform in Italy yields the following results. We find positive output consequences of the policy, though with sector-specific growth patterns. We also document negative impact on income distribution that varies across households. Our results suggest that when tax evasion is included in the analysis, the positive impact on economic growth is amplified, with major consequences on export-oriented sectors, while the negative impact on equity diminishes. The results are valid after performing different sensitivity checks and alternative integration processes. Finally, policy implications are discussed.