Irpef: (Un)Fairness and (in)efficiency. A structural analysis based on the BIMic microsimulation model

We discuss the structural features of the Italian personal income tax (Irpef) and its effects on income redistribution and labour supply incentives. The analysis is carried out using Banca d’Italia’s static microsimulation model BIMic. We find that Irpef plays a decisive role in making the Italian tax system progressive; almost all of the redistribution that comes from Irpef is due in equal measure to the structure of income brackets and to deductions, while the definition of the tax base has an ambiguous effect overall on Irpef’s redistributive effects. As regards the efficiency and the degree of distortion of economic agents’ choices, we note the presence of high values of effective marginal tax rates rates (EMTRs) also at relatively low levels of income; moreover, the variability of EMTRs is also large within the same income class. Finally, we discuss two counterfactual hypotheses that modify the ‘Irpef bonus’ with respect to the 2019 legislation. The difference between the two hypotheses concerns the extent of the increase and, above all, the speed at which the bonus phases out as income increases. Both alternatives result in a reduction of both inequality and EMTRs compared with the baseline scenario. Moreover, the traditional equity-efficiency trade-off is confirmed, since the reduction in EMTRs is more pronounced in the scenario where that of inequality is milder, and vice versa.