Taxing income or consumption: macroeconomic and distributional effects for Italy
JRC Working Papers on Taxation and Structural Reforms No 13/2021
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.
D'ANDRIA Diego;
DEBACKER Jason;
EVANS Richard W.;
PYCROFT Jonathan;
ZACHLOD-JELEC Magdalena;
2021-12-01
European Commission
JRC127016
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