The Erosion of the Personal Income Tax Base in Italy: Equity Aspects

Abstract

This paper aims at analyzing the distributional (and revenue) effects of the deviations of the personal income tax (PIT) base in Italy from the taxpayer’s total income that was proposed as tax base by the Commission for the Study of Tax Reform in 1964 (which was inspired by the Schanz-Haig-Simons concept of income). It is clear in both the Report of the Commission and Cosciani’s writings that an equitable tax system requires that all income items are taxed within the PIT. However, financial income in Italy is excluded from the PIT since its introduction in 1974, and the erosion of the PIT base has continued to date. In the second part of the paper the contribution of the different types of income to the PIT base in Italy with respect to GDP between 1980 and 2012 is analyzed, and an assessment of the redistributive effect of the hypothetical inclusion of financial income in the PIT base is provided, using data from tax returns for 2010

Labor share as an "automatic stabilizer" of income inequality

“…Labor share as an "automatic stabilizer" of income inequality brackets, deductions, tax credits, preferential tax treatments of labor income, and allowances for labor expenses. Our theoretical framework shows that an additional relevant channel through which the PIT may reduce inequality deriving from market forces is related to the characteristics and width of its base (Baldini, 2021;Bises & Scialà, 2014;Figari & Paulus, 2015). When the PIT base perfectly matches the comprehensive income definition, i.e., the S-H-S (Schanz-Haig-Simons) definition of income, what determines the capacity of the PIT to react to higher market income inequality is that part of the PIT structure that affects the level of income.…”