1. A tax-benefit reform for Italy
Fernando DI NICOLA e Ruggero PALADINI
SIEP Conference - September 2017

2. Components of Italian tax benefit system
Social contributions (a sort of fund for future actuarial pension)
Tax rate and brackets of personal comprehensive income tax (IRPEF): 23% up to 15000, 27% up to 28000, 38% up to 55000, 41% up to 75000, 43% over
Income type tax credit (decreasing in income range 8-55 k€)
Family tax credit (decreasing up to over 100 k€ of personal income)
Expenditures tax credits («tax expenditures»)
Regional and municipal additional tax (same tax base of IRPEF)
ANF family allowance
SIA anti poverty and inclusion check (REI since 2018)
Monthly bonus 80€ for employees (range k€)
Other bonuses (maternity allowance, teachers, 18 years old, third child, …)

3. Reasons for a reform
Personal income tax (and its local additional) with actual three tax rate: exemption up to 8-15 k€, 30% over €15000 and 45% over only €28000 (up to millions)
Many and relevant implicit tax rates (no clarity and perception) => EMTR up and down (social contribution, decreasing tax credits)
Poverty trap and its inverse (bonus 80€, local surtax)
Poors/working poors excluded from checks/allowance:
minimum income for bonus 80€
ANF family allowance reserved to employees
«incapienza»: poor tax payers do not take money of «due» tax credits for insufficient gross IRPEF/PIT
Inefficient redistributive action due to benefits calibrated upon individual «Irpef defined» income
Simultaneous, overlying, inconsistent individual and family approach

4. Reasons for a reform: inefficient EMTR

5. Reasons for a reform: family tax credit not collected
tenth (decile) of equivalent income
% family tax credit collected 1
25% 2
69% 3
80% 4
86% 5
89% 6
95% 7
94% 8
92% 9
93% 10
Total
79%
=> about 2.5 billion not collected over 14.3 “due” for dependent children

6. Criteria for a feasible reform
Split between individual personal taxes, contributions, benefits linked to work, and family allowances for social goals (poverty, children, …), based on indicators of family situations
A reduction of social contribution at lower income, for avoiding “incapienza”, keeping down EMTR and incentiving labor supply
Removal of mechanisms generating jumping tax rate
Equivalent (actually global) income as indicator of family economic situation for allowances, out of individual PIT/IRPEF => income from assets computed once, not as for ISEE
Reinforcement of support for children care and poor households

7. Details of the proposed reform

8. Main aggregate changes with Hp reform
Number of affected stakeholders
Aggregate changes
(millions of euro)
Budgeted social security contributions
19'457'352
15'273
Contribution of people for new checks (ASN)
38'304'541
7'189
Changes in tax credits
37'380'286
-10'716
Repeal of Bonus 80€
10'603'862
-8'816
Change in net Irpef
32'715'061
3'823
Change in Irpef and surcharge without family tax credits
33'722'382
-10'432
Change in regional surcharge
32'183'677
Change in communal surcharge
32'698'923
-78
Change in total benefit to families
25'394'215
2'169
Change in disposable income
42'067'933
-11'354

9. Main redistributive indicators stakeholders before and after reform
Num ≠ 0
GINI indexes
Gini Gross Income
44'899'419
47.1%
Gini Ydisposable before reform
41.8%
Gini Ydisposable after reform
41.1%
R-S before
5.3%
R-S after
6.0%
Kakwani before
20.7%
Kakwani after
21.5%
 Poverty Indicators
Before
After
Poverty head count ratio
15.3
14.4
Income Gap Ratio
37.7
34.4

10. Incidence tax benefit without and with reform

11. Tax wedge per income level before and after reform
Gross family income 2017
% Tax wedge with reform
Change in percentage point
Up to 20th Euro
6.0%
-11.1
20-40th Euro
38.2%
-1.7
Over 40th Euro
46.6%
-1.1
Total
37.8%
-2.7

12. Gain or loss for single employee
Gain area
Loss area

13. Absolute change for two employees with two children (one income €25000)
Gain area
Loss area

14. Absolute change self-employed with spouse and two dependent children
Gain area
Loss area