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

Microreg: a Traditional Tax-Benefit Microsimulation Model Extended to Indirect Taxes and In-Kind Transfers

“…The increase in VAT rates has a clear regressive impact, since the disposable income is reduced more for the first quintile with respect to the others. Similar results are in Arachi et al (2012). By simulating an increase to 23.5% and to 12.5% in the ordinary and the reduced tax rate they observe a regressive redistribution.…”