Fiscal Reforms during Fiscal Consolidation: The Case of Italy

Abstract

We discuss the strengths and weaknesses of the fiscal consolidation package adopted by Italy in 2011. Estimated at 3.3% of GDP, the tax measures were introduced to reduce public deficits without weakening the prospects of economic recovery or producing adverse redistributive outcomes. The tax reform mainly increases consumption and property taxes and gives relief for firms that recapitalize or hire young workers and women. To some extent, these measures are consistent with scholarly suggestions to foster short-and long-term economic growth by shifting the tax burden from capital and labour income towards consumption and property. Using microsimulation models, we evaluate the distributional and growth effects of the tax package. The indirect and property tax reforms are highly regressive, while the reform as a whole makes limited resources available for growth-enhancing policies, in terms of a reduction in the effective corporate tax burden. We propose a revenue neutral alternative reform that allows channelling more fiscal resources towards corporate tax relief, while at the same time producing less regressive distributional effects.JEL Codes: H2, D22, D31

On the Use of the Value Added Tax for Redistributive Purposes in Italy

“…Microsimulation models are among the most widely used tools for assessing the tax burden and redistributive effects of VAT, both in its statutory configuration and, in particular, in the case of reform scenarios. With regard to Italy, Baldini (2001) uses the MAPP98 model to study, among other institutional features of the Italian taxbenefit system, the impact of VAT, using data on 1998 incomes from SHIW; Arachi et al (2012) analyse the impact of the fiscal consolidation policy adopted in 2011, using a static microsimulation model based on a specific matching between 2010 SHIW data and Istat household consumption data. Again, by integrating consumption and SHIW data, the Bank of Italy's microsimulation model, BIMic, is extended to incorporate the role of VAT (Curci et al 2017).…”

“…Reforms of the value added tax in Italy have been discussed for many years, and the debate has focused mainly on whether to change the levels of the tax rates or their number, either for the purposes of redistribution or efficiency. Nevertheless, in the most recent past, revisions have been confined to changing the ordinary tax rate from 20 to 21% in 2011 and to 22% in 2013, mainly to deal with the Italian public finance constraints in the absence of alternative sources of funding the budget (Arachi et al 2012). However, interest in modifying the structure of VAT persists, for at least two reasons.…”

Italy's Ace Tax and its Effect on a Firm's Leverage

“…Although this effect varies according to area, size and sectors, the ACE relief is in any case expected to 1 This tax provision is contained in a comprehensive fiscal reform aimed at reaching a balanced public budget in 2013. For further details on its characteristics and overall effects see, e.g., Arachi et al (2012). 2 The idea of taxing above-normal income is not new: during the first world war, many countries involved in that conflict introduced devices aimed at taxing "war-profiteering", that is profits that exceeded normal peace-time profits.…”

“…Due to budget constraints, the Italian Government decided not to extend this provision to the entire equity stock. According to Arachi et al (2012), however, an ACE allowance proportional to the net wealth stock would have been affordable, as it would cost about 4 billion Euros (i.e., about 0.25% of GDP). In this case, the average effective tax rate would have been reduced by more than 9%.…”