## cr1941

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---

### Systemic diagnosis and context
- Italy has weak economic and social outcomes linked to gaps in the social welfare system and a high tax burden on workers.
- Labor market and poverty indicators:
  - Unemployment is high at about 10 percent.
  - In the South unemployment is twice the national average.
  - Among youth unemployment is three times the national average and among the highest in Europe.
  - Population at risk of poverty rate increased from 18.9 percent in 2008 to 20.3 percent in 2017; in the South and Islands it is about 33.1 percent.
  - Real incomes of employees and other workers remain below pre-euro accession levels; younger generations and middle-aged households are also below those historic levels, while real wealth and incomes of older households and pensioners remain above the levels of two decades ago.
- Social protection spending and coverage:
  - Social protection spending is approximately 30 percent of GDP, with the bulk going to pensions.
  - Non-pension social benefit spending is lower than the euro area average (social inclusion, family/child benefits, housing).
  - Italy excludes about 60 percent of its poorest population from adequate social protection, while the euro zone on average excludes about 40 percent.
  - The most vulnerable categories are working-age families with children; retirees have declining poverty rates due to pension coverage.

### Structure and fragmentation of the welfare system
- The welfare system is complex and fragmented with numerous programs across social insurance and social assistance.
- Pensions are based on earned rights and can take a long time to decrease due to slow attrition.
- Systemic biases:
  - The system favors pensioners and male individuals in large firms and unionized sectors.
  - Incidence of relative poverty and in-work poverty rates are higher than the European average and grew during the crisis.
- Families increasingly rely on intra-family transfers for social assistance, though this is being reduced by declining family sizes.

### Gaps in unemployment and income support
- Italy lacks an extensive two-pillar unemployment benefits system or an adequately funded last-resort income support scheme, leaving a large share of the non-working poor unprotected; young individuals are particularly vulnerable.
- Comparative models:
  - Typical two-pillar systems: first pillar for contributors, second pillar for those who have not contributed or exhausted benefits (examples: Germany, Finland, Ireland, United Kingdom).
  - In Italy the second pillar exists only for those who have exhausted unemployment insurance benefits; not available for those who never contributed (other countries with such a model include Austria, France, Portugal, Spain).

### Recent and planned programs: REI and proposed RC
- Inclusion Income (REI) introduced in 2017 as a centralized last-resort income support scheme:
  - Budgetary cost: €2 billion per year (0.1 percent of GDP).
  - Under full take-up REI would reach 45.8 percent of households in absolute poverty and 22.5 percent of those in relative poverty.
  - Targeting double means test: ISEE must be below €6,000 and the income component must be less than €3,000.
  - Household real-estate assets (excluding main dwelling) must be ≤ €20,000 and financial assets ≤ €10,000.
  - Transfer amounts: minimum of €187.5 for a one-person household and maximum of €485.41 for households with 5 or more members; transfer is computed as the difference between the ISEE and disposable income and allows deduction of rent paid.
  - REI requires participation in a personalized work/social program involving civic services (municipalities, job centers, schools, healthcare).
- Proposed Reddito di Cittadinanza (RC) announced in the 2019 Draft Budget Plan:
  - Budgeted amount in November 2018 Draft Budget Plan: ½ percent of GDP per year.
  - Design elements under discussion include target population, means testing, eligibility constraints (e.g., beneficiaries cannot refuse more than two consecutive job offers), duration of benefits (e.g., up to three years), size of benefits (e.g., monthly payment up to the relative poverty line of €780 per eligible citizen), top-up formulas (e.g., rent tops), incentives for formal labor market participation, and conditionality via a service pact for reintegration.
  - About 20 percent of the 5 million potential beneficiaries have their own homes; 46.5 percent of the possible beneficiaries are in the Center-North.

### Unemployment benefit reforms and details (NASPI, DIS-COLL, ASDI)
- NASPI (Nuova Assicurazione Sociale per l’Impiego), introduced by the 2015 Jobs Act:
  - Entitlement requires national insurance payments for at least 13 weeks in the previous four years or 18 days in the last 12 months.
  - NASPI recipients are entitled to 75 percent of their average salary of the previous 4 years, up to a maximum of €1,195 per month.
  - NASPI payment decreases by 3 percent every month after the fourth month.
  - NASPI can be claimed for half the number of months the claimant has paid their national insurance for, up to a maximum of 2 years.
  - Entitlement is conditional on active job search and participation in professional training.
- Other schemes:
  - DIS-COLL: unemployment insurance for dependent self-employed workers.
  - ASDI: experimental assistance scheme for workers no longer entitled to NASPI; ASDI was equal to 75 percent of the last NASPI payment and available for a maximum of six months; ASDI was replaced by REI in 2018.
- Except for ASDI, unemployment benefits in Italy are attributed on a contributory basis, leaving large groups of non-working poor unprotected.

### Fiscal and policy trade-offs; reform principles
- Fiscal constraints and trade-offs:
  - Potential increases in spending (from modernizing the safety net for the poor) and revenue reductions (from lowering taxes on labor) must be consistent with a fiscal consolidation path that ensures Italy’s public debt declines firmly.
  - Complementary measures are needed to lower current spending and broaden the tax base.
- Reform design considerations:
  - Reforms should be part of a comprehensive package to boost productivity, investment, and job creation.
  - Transition from REI to RC requires consideration of costs, implementation capacity, and risks of poverty traps and distorted incentives to look for formal work and pay taxes given tax evasion and the shadow economy.
  - Key risks include high participation taxes if benefit withdrawal rates are steep and beneficiaries combining benefits with informal work; a strong income effect from generous benefits could encourage low-income workers to stop job search.

### Design principles: Guaranteed Minimum Income (GMI) versus basic (citizenship) income
- GMI characteristics:
  - Selective: targets the poor.
  - Conditional: recipients must commit to finding a job or participating in activation programs (employment and training).
  - Means-tested: entitlement depends on household income and wealth.
- Basic (citizenship) income characteristics:
  - Universal: applies to all citizens regardless of need.
  - Unconditional: no requirements to receive the transfer.
  - Not means-tested.
- Recommendation: a well-designed and adequately-funded GMI offers a transparent instrument to support the non-working poor while incorporating activation requirements.

### General features and guidance for GMI programs
- Coverage and duration:
  - Target: working-age individuals and their households who have fallen into poverty by guaranteeing a minimum income.
  - Benefit duration: unlimited.
  - Most countries provide additional housing allowances, health care etc.
  - Credible means-testing is essential.
- Benefit level:
  - The “guaranteed” household income limit is usually in the range of 40–70 percent of the “at-risk-of-poverty” level to avoid poverty traps.
  - The state tops up the income of the beneficiary up to that limit.
- Incentives and conditionality:
  - Well-designed schemes incorporate features to incentivize work, such as income disregard or gradual benefit phase-outs.
  - Minimum income provision is generally conditional on participation in active labor market policies (ALMPs); eligibility is also linked to asset criteria.

### Italy-specific GMI timing, benchmarks, and incentives
- Coverage, means-testing, and duration:
  - Policy guidance: aim for broad (or universal) coverage with credible means testing and not be time-bound.
  - REI duration: 18 months (extendable for another 12 months with a 6-month gap).
  - RC could have a duration of up to 3 years.
  - REI demonstrates Italy has sufficient capacity to implement accurate means tests.
  - Given high informality, verification of financial assets and income declaration of the self-employed should be considered in RC design to avoid errors of inclusion.
- Benefit levels and benchmarks:
  - Recommended “guaranteed” household income limit: 40–70 percent of the “at-risk-of-poverty” level.
  - Italy 2016 benchmark: at-risk-of-poverty threshold for Italy (2016) is €9,748 per year or €812 per month.
  - Simple benchmarking indicates monthly benefit in the order of €325–€568.
  - If RC benefit level set at €780 per month, it would stand out as generous.
  - REI with €3,100 annual or €260 monthly income limit would not cover basic needs.
- Incentives to work and withdrawal rates:
  - Risks: generous benefit levels (income effect) and high withdrawal rates (participation tax / price effect) could strongly disincentivize work.
  - Design elements to strengthen incentives:
    - Conditional in-work tax credits (including for secondary earners).
    - Marginal income disregard for part-time and casual work.
    - Gradual benefit phase-outs.
    - Back-to-work bonuses.
  - ALMP participation: all able-bodied adults should be required to register with public employment services and be available to participate in activation services.
  - Observation: REI has a high withdrawal rate (though below 100 percent); if RC uses a top-up benefit formula that creates a high withdrawal rate absent other tools, it risks falling short of objectives of facilitating work and exits from poverty traps.

### Pragmatic reform path for Italy
- Recommendation:
  - Gradually expand REI as the basis of a modern GMI scheme within a comprehensive review of Italy’s social welfare system.
- Rationale: REI strengths and weaknesses:
  - Desirable features: credible double means test (based on the ISEE indicator), functioning delivery infrastructure, centralized administration.
  - Limitations: limited coverage (unable to reach all households in relative poverty), benefit levels below international benchmarks, time bound, relatively high withdrawal rates, under-developed local administration of ALMPs.
- Proposed adjustments:
  - Direct additional resources to REI to ease eligibility criteria and scale up benefit levels to international benchmarks.
  - Reinforce mechanisms in REI that attenuate disincentives to work.
  - Include in-work tax credits for low-wage secondary earners, gradual benefit phase-outs, and income disregards to reduce scope for abuse.
  - Upgrade effectiveness of ALMPs.

### EUROMOD simulation: hypothetical GMI program
- Design assumptions:
  - Poverty threshold: “at-risk-of-poverty” defined as 40 percent of median equivalized household disposable income.
  - Transfers top up households’ disposable income to this threshold based on double means tests (ISEE below €6,000 and income component less than €4,000).
  - Disability benefits fully disregarded.
  - All other social benefits, including family allowances, treated as income.
  - Household asset limits: no real assets (excluding main dwelling) worth more than €20,000 and financial assets worth more than €10,000.
  - Perfect targeting assumed with full take up.
  - No increases in taxes and social contributions and/or reductions in other social benefits assumed.
  - Model: static (does not account for behavioral responses).
- Simulation results:
  - Covers about 1.8 million households.
  - Cost: about €9 billion (½ percent of GDP).
  - Beneficiaries: 7.1 percent of Italian households, corresponding to 4.1 million individuals, which is 6.9 percent of the total population.
  - Average benefits to households: about €4,800 per year or €400 per month.
  - Benefits strongly concentrated in the South where poverty levels are higher.

### INPS simulations for a potential RC program
- INPS assumptions (stricter eligibility but higher benefit levels):
  - ISEE below €9,360.
  - Household must not have real assets (including main dwelling) worth more than €30,000 or financial assets worth more than €6,000 for single-person households, €8,000 for couples, and €10,000 for three-person households (increasing by €1,000 per additional family member).
  - Benefits calculated based on a top-up formula.
  - Welfare transfers are fully subtracted.
  - Assuming 50 percent under-declaration of financial assets.
  - Note: if INPS could verify financial assets with the “national register of financial accounts”, the cost would be substantially lower.
- INPS simulation results:
  - Cost: estimate of a potential RC program at €12 billion per year.
  - Coverage: more than 2 million households, or 4.3 million individuals.
  - Average benefits to households: €6,000 per year.
  - Distribution: close to 70 percent of resources transferred to households in the poorest two deciles; benefits homogeneously distributed geographically.
  - Withdrawal rate (participation tax or price effect): would range between 81–92 percent for different groups given gradual phase-out design, adversely affecting incentives.

### Personal income taxation in Italy — overview and key statistics
- IRPEF (personal income tax) structure:
  - Progressive tax scale with a starting rate on the first earned euro of 23 percent and a top tax rate of 43 percent for income exceeding €75,000.
  - Additional regional addizionali IRPEF: 1.23 percent to 3.33 percent.
  - Additional local addizionali IRPEF: 0 to 0.9 percent.
- High tax burden indicators:
  - Implicit tax rate on labor in Italy: 43.2 percent (second highest in the EU).
  - Share of personal income tax in total taxes: 41 percent.
  - Ratio of social security contributions to GDP: 13.4 percent.
  - Average tax wedge for a single person earning an average income: 47.9 percent (OECD average: 35.9 percent).
- IRPEF 2016 tax schedule:
  - ≤15000: 23%
  - 15000–28000: 27%
  - 28000–55000: 38%
  - 55000–75000: 41%
  - ≥75000: 43%
- Tax expenditures and compliance:
  - Large set of tax deductions and tax credits on labor income (6 percent of GDP).
  - National Income Tax Bonus (in-work tax credit): equal to €80 per month; starts with minimum annual gross salary of €8,000; decreases proportionally for annual gross salaries between €24,600 and €26,600; cost to budget about €9 billion per year (about ½ percent of GDP).
  - Compliance gap on personal income taxes: about 2 percent of GDP.

### EUROMOD simulation of a flatter personal income tax regime
- Context: Authorities’ 2019 Draft Budget Plan measures:
  - Extend ‘regime forfettario’ for self-employed: earnings threshold €65,000 (previously €25,000–€50,000 depending on activity), apply 15 percent tax rate, eliminate some asset/personnel cost requirements.
  - From 2020: new regime for self-employed with earnings between €65,000 and €100,000 taxed at 20 percent.
  - Number of beneficiaries to increase from around 950 thousand to over one and a half million.
  - Budgetary cost about €1.8 billion (0.1 percent of GDP) at peak.
  - Draft budget also introduces permanent tax break on reinvested profits and changes several tax incentives.
- Simulated flatter PIT reform (not in draft budget) assumptions:
  - Personal income tax rates simplified to only two rates: 15 percent and 20 percent.
  - Different income thresholds tested for when rates apply (ranging from €30,000 to €80,000).
  - Tax allowance of €3,000 for low-income households.
  - Existing set of tax deductions and credits maintained in baseline simulation unless base broadening applied.
- Simulation results:
  - Cost estimated at €80–90 billion (about 5 percent of GDP) depending on income threshold, unless accompanied by base broadening.
  - With partial base broadening for a threshold of €80,000 on family income, Baldini and Rizzo (2018) estimate net cost of €50 billion (about 3 percent of GDP).
  - Distributional impact: reform would be highly regressive, benefiting mostly the well-off in the top decile and resulting in a higher Gini coefficient.

### Reform principles for comprehensive PIT reform
- Preconditions:
  - Any lowering of personal income tax rates should occur within a comprehensive review of the overall tax-benefits structure.
  - Reform must be consistent with a fiscal consolidation path that ensures Italy’s public debt declines firmly.
  - Before lowering rates, the tax base should be broadened with high-quality measures to ensure revenues in line with the recommended fiscal path.
- Core principles of comprehensive reform:
  - (i) maintain progressivity and support labor supply;
  - (ii) ensure tax neutrality;
  - (iii) enhance tax certainty;
  - (iv) broaden the tax base.

### Income redistribution considerations and labor-supply incentives
- Effective marginal tax rates and labor supply:
  - Statutory tax rate reductions could encourage labor supply but would be regressive under the current distribution of marginal effective tax rates.
  - The effective marginal tax rate schedule should be progressive.
  - Large variability of effective marginal income tax rates from regulatory stratifications (e.g., the €80 measure) distorts labor supply decisions.
  - Italy has the lowest labor supply of married women among EU countries driven in part by a tax credit for non-working spouses.
  - Consider replacing the family (“dependent spouse”) tax credit with a tax credit for households if both spouses are employed (working family tax credit or in-work tax credit for secondary earners), possibly increasing with the number of children.
  - Available evidence suggests in-work tax credits for low income earners have sizable positive impacts on female labor-force participation and aggregate employment; for Italy, Colonna and Marcassa (2015) find replacing the dependent-spouse tax credit with an in-work tax credit would increase the married-women participation rate by 3 percentage points.
- Complementary measure:
  - Consider reducing the employers’ social security contribution rate closer to the EU average to reduce labor costs and increase labor demand in the short term, coordinated with pension policies over time.

### Tax neutrality, uncertainty, base broadening, and enforcement
- Tax neutrality:
  - Reforms should ensure tax neutrality so decisions are based on economic merits and not tax reasons.
  - Example: combined tax treatment of dividend income and implications of proposed corporate and personal rate changes illustrate need for systemic approach.
- Tax uncertainty:
  - Frequency of tax changes in Italy is relatively high compared to other G20 countries and contributes to tax uncertainty, raising a “hold-up problem” for investment.
- Broadening the tax base and enforcement:
  - High quality measures needed: addressing large compliance and policy gaps, rationalizing tax expenditures, stricter enforcement, and introducing a modern tax on primary residences based on updated cadastral values.
  - Tax gap (2013-15 average, Italian Ministry of Economy and Finance): around €109 billion per year, over 6 percent of GDP.
  - Stock of unpaid tax and social security contribution debt in 2016: €614 billion (about 35 percent of GDP), of which only €31 billion (less than 2 percent of GDP) is deemed collectible.
  - Permanent reductions in arrears require deep institutional and behavioral changes; recurrent tax amnesties can undermine compliance culture.

### Conclusion — policy recommendations and fiscal framing
- Key recommendations:
  - Introduce a well-designed and adequately-funded guaranteed minimum income program for the poor—one that is not time bound; caps benefits at levels that avoid welfare dependence; includes gradual benefit phase-outs, income disregards, or conditional in-work benefits to incentivize regular work; and has adequate controls to prevent abuse with effective local administrative capacity.
  - Introduce such a program in the context of a comprehensive review of the social welfare system, by gradually scaling up the inclusion income program, at a cost of about ½ percent of GDP, and rationalizing other anti-poverty schemes.
  - Any consideration to flatten personal income tax rates should be undertaken in the context of a comprehensive review of the income taxes and the structure of benefits, be consistent with a fiscal consolidation path that ensures Italy’s public debt declines firmly, maintain progressivity and support labor supply, safeguard tax neutrality, enhance tax certainty, and broaden the tax base.

*Source: IMF staff discussion in chapter “22. Income redistribution considerations should be balanced with adequate labor-supply incentives.”*

### References ____________________________________________________________________________ 18

### cr1941 - References ____________________________________________________________________________ 18

### Systemic diagnosis and context
- Italy has weak economic and social outcomes linked to gaps in the social welfare system and a high tax burden on workers.
- Unemployment is high at about 10 percent; in the South it is twice the national average; among youth it is three times the national average and among the highest in Europe.
- The population at risk of poverty rate increased from 18.9 percent in 2008 to 20.3 percent in 2017 but is about 33.1 percent in the South and Islands.
- Real incomes of employees and other workers remain below pre-euro accession levels; real incomes of younger generations and middle-aged households are also below those historic levels, while real wealth and incomes of older households and pensioners remain above the levels of two decades ago.
- Social protection spending is approximately 30 percent of GDP, with the bulk going to pensions; non-pension social benefit spending is lower than the euro area average (social inclusion, family/child benefits, housing).
- Italy excludes about 60 percent of its poorest population from adequate social protection, while the euro zone on average excludes about 40 percent.
- The most vulnerable categories are working-age families with children; retirees have declining poverty rates due to pension coverage.

### Structure and fragmentation of the welfare system
- The welfare system is complex and fragmented with numerous programs across social insurance and social assistance (listed program categories and items in the source).
- Pensions are based on earned rights and can take a long time to decrease due to slow attrition.
- The system favors pensioners and male individuals in large firms and unionized sectors; incidence of relative poverty and in-work poverty rates are higher than the European average and grew during the crisis.
- Families increasingly rely on intra-family transfers for social assistance, though this is being reduced by declining family sizes.

### Gaps in unemployment and income support
- Italy lacks an extensive two-pillar unemployment benefits system or an adequately funded last-resort income support scheme, leaving a large share of the non-working poor unprotected; young individuals are particularly vulnerable.
- Typical two-pillar systems: first pillar for contributors, second pillar for those who have not contributed or exhausted benefits (examples: Germany, Finland, Ireland, United Kingdom).
- In Italy the second pillar exists only for those who have exhausted unemployment insurance benefits; not available for those who never contributed (other countries with such a model include Austria, France, Portugal, Spain).

### Recent and planned programs: REI and proposed RC
- Inclusion Income (REI) introduced in 2017 as a centralized last-resort income support scheme but at a budgetary cost of €2 billion per year (0.1 percent of GDP) it is inadequately funded and only partially supports the population in poverty.
- Under full take-up REI would reach 45.8 percent of households in absolute poverty and 22.5 percent of those in relative poverty.
- REI is targeted via a double means test: ISEE must be below €6,000 and the income component must be less than €3,000. Household real-estate assets (excluding main dwelling) must be ≤ €20,000 and financial assets ≤ €10,000.
- REI transfer amounts vary between a minimum of €187.5 for a one-person household and a maximum of €485.41 for households with 5 or more members; the transfer is computed as the difference between the ISEE and disposable income and allows deduction of rent paid.
- REI requires participation in a personalized work/social program involving civic services (municipalities, job centers, schools, healthcare).
- The 2019 Draft Budget Plan announced a proposed Reddito di Cittadinanza (RC or Citizen’s Income Program) expected to replace REI; design elements under discussion include target population, means testing, eligibility constraints (e.g., beneficiaries cannot refuse more than two consecutive job offers), duration of benefits (e.g., up to three years), size of benefits (e.g., monthly payment up to the relative poverty line of €780 per eligible citizen), top-up formulas (e.g., rent tops), incentives for formal labor market participation, and conditionality via a service pact for reintegration.
- The amount budgeted in the November 2018 Draft Budget Plan for RC was ½ percent of GDP per year.
- About 20 percent of the 5 million potential beneficiaries have their own homes; 46.5 percent of the possible beneficiaries are in the Center-North.

### Unemployment benefit reforms and details (NASPI, DIS-COLL, ASDI)
- The 2015 Jobs Act introduced NASPI (Nuova Assicurazione Sociale per l’Impiego): entitlement requires national insurance payments for at least 13 weeks in the previous four years or 18 days in the last 12 months.
- NASPI recipients are entitled to 75 percent of their average salary of the previous 4 years, up to a maximum of €1,195 per month. NASPI payment decreases by 3 percent every month after the fourth month. NASPI can be claimed for half the number of months the claimant has paid their national insurance for, up to a maximum of 2 years. Entitlement is conditional on active job search and participation in professional training.
- The Jobs Act also introduced unemployment insurance for dependent self-employed workers (DIS-COLL) and an experimental assistance scheme ASDI for workers no longer entitled to NASPI; ASDI was replaced by REI in 2018. ASDI was equal to 75 percent of the last NASPI payment and available for a maximum of six months.
- Except for ASDI, unemployment benefits in Italy are attributed on a contributory basis, leaving large groups of non-working poor unprotected.

### Fiscal and policy trade-offs; reform principles
- Potential increases in spending (from modernizing the safety net for the poor) and revenue reductions (from lowering taxes on labor) must be consistent with a fiscal consolidation path that ensures Italy’s public debt declines firmly; complementary measures are needed to lower current spending and broaden the tax base.
- Reforms should be part of a comprehensive package to boost productivity, investment, and job creation.
- For the transition from REI to RC, the authorities must consider costs, implementation capacity, and risks of poverty traps and distorted incentives to look for formal work and pay taxes given tax evasion and the shadow economy.
- Key risks include high participation taxes if benefit withdrawal rates are steep (discouraging formal work) and beneficiaries combining benefits with informal work; a strong income effect from generous benefits could encourage low-income workers to stop job search.

### Design principles for a Guaranteed Minimum Income (GMI) versus basic (citizenship) income
- GMI characteristics:
  - Selective: targets the poor.
  - Conditional: recipients must commit to finding a job or participating in activation programs (employment and training).
  - Means-tested: entitlement depends on household income and wealth.
- Basic (citizenship) income characteristics:
  - Universal: applies to all citizens regardless of need.
  - Unconditional: no requirements to receive the transfer.
  - Not means-tested.
- Recommendation: a well-designed and adequately-funded GMI offers a transparent instrument to support the non-working poor while incorporating activation requirements.

*International Monetary Fund — cr1941 - References ____________________________________________________________________________ 18*

### 9.      While GMI programs differ across countries, they are often aimed at poverty reduction

### 9.      While GMI programs differ across countries, they are often aimed at poverty reduction

### General features of Guaranteed Minimum Income (GMI) programs
- Coverage and duration:
  - Target: working-age individuals and their households who have fallen into poverty by guaranteeing a minimum income.
  - Benefit duration: unlimited.
  - Most countries provide additional housing allowances, health care etc.
  - Credible means-testing is essential.
- Benefit level:
  - The “guaranteed” household income limit is usually in the range of 40–70 percent of the “at-risk-of-poverty” level to avoid poverty traps.
  - The state tops up the income of the beneficiary up to that limit.
- Incentives:
  - Well-designed schemes incorporate features to incentivize work, such as income disregard or gradual benefit phase-outs.
- Conditionality:
  - Minimum income provision is generally conditional on participation in active labor market policies (ALMPs); eligibility is also linked to asset criteria.

### Coverage, means-testing, and duration (¶10)
- Policy guidance:
  - Aim for broad (or universal) coverage with credible means testing and not be time-bound.
  - Benefits below the relative poverty line should be universal in coverage (i.e., not restricted by geographical or demographic criteria) and not bound by a specific time limit.
- Italy-specific timing note:
  - REI has a duration of 18 months (extendable for another 12 months with a 6-month gap).
  - RC could have a duration of up to 3 years.
- Means-testing:
  - Ability to verify households’ income and assets is crucial; credible means test reduces errors of inclusion or exclusion.
  - REI demonstrates that Italy has sufficient capacity to implement accurate means tests.
  - Given high informality, verification of financial assets and income declaration of the self-employed should be considered in RC design to avoid errors of inclusion.

### Benefit levels and benchmarks (¶11)
- Recommended range:
  - “Guaranteed” household income limit: usually set in the range of 40–70 percent of the “at-risk-of-poverty” level.
- Italy 2016 benchmark:
  - At-risk-of-poverty threshold for Italy (2016): €9,748 per year or €812 per month.
  - Simple benchmarking indicates monthly benefit in the order of €325–€568.
  - If RC benefit level set at €780 per month, it would stand out as generous.
  - REI with €3,100 annual or €260 monthly income limit would not cover basic needs.

### Incentives to work and withdrawal rates (¶12–13)
- Risks to labor supply:
  - Generous benefit levels (income effect) and high withdrawal rates (participation tax / price effect) could strongly disincentivize work and discourage labor force participation.
- Design elements to strengthen incentives:
  - Conditional in-work tax credits (including for secondary earners).
  - Marginal income disregard for part-time and casual work.
  - Gradual benefit phase-outs.
  - Back-to-work bonuses.
- Italy observations:
  - REI has a high withdrawal rate (though below 100 percent).
  - If RC uses a top-up benefit formula that creates a high withdrawal rate absent other tools, it risks falling short of objectives of facilitating work and exits from poverty traps.
- ALMP participation:
  - All able-bodied adults should be required to register with public employment services and be available to participate in activation services to reduce disincentives and control costs.
  - Conditioning on public works, job training, placement, education can help move households into employment.
  - If there is a high degree of welfare dependence (such as in a poorly-designed scheme), ALMPs are likely to be less effective.

### Pragmatic reform path for Italy (¶14)
- Recommendation:
  - Gradually expand REI as the basis of a modern GMI scheme within a comprehensive review of Italy’s social welfare system.
- Rationale: REI strengths and weaknesses
  - Desirable features: credible double means test (based on the ISEE indicator), functioning delivery infrastructure, centralized administration.
  - Limitations: limited coverage (unable to reach all households in relative poverty), benefit levels below international benchmarks, time bound, relatively high withdrawal rates, under-developed local administration of ALMPs.
- Proposed adjustments:
  - Direct additional resources to REI to ease eligibility criteria and scale up benefit levels to international benchmarks.
  - Reinforce mechanisms in REI that attenuate disincentives to work.
  - Include in-work tax credits for low-wage secondary earners, gradual benefit phase-outs, and income disregards to reduce scope for abuse.
  - Upgrade effectiveness of ALMPs.

### EUROMOD simulation: hypothetical GMI program (¶15–16)
- Design assumptions:
  - Poverty threshold: “at-risk-of-poverty” defined as 40 percent of median equivalized household disposable income.
  - Transfers top up households’ disposable income to this threshold based on double means tests (ISEE below €6,000 and income component less than €4,000).
  - Disability benefits fully disregarded.
  - All other social benefits, including family allowances, treated as income.
  - Household asset limits: no real assets (excluding main dwelling) worth more than €20,000 and financial assets worth more than €10,000.
  - Perfect targeting assumed with full take up.
  - No increases in taxes and social contributions and/or reductions in other social benefits assumed.
  - Model: static (does not account for behavioral responses).
- Simulation results:
  - Covers about 1.8 million households.
  - Cost: about €9 billion (½ percent of GDP).
  - Beneficiaries: 7.1 percent of Italian households, corresponding to 4.1 million individuals, which is 6.9 percent of the total population.
  - Average benefits to households: about €4,800 per year or €400 per month.
  - Benefits strongly concentrated in the South where poverty levels are higher.

### INPS simulations for a potential RC program (¶17)
- INPS assumptions (stricter eligibility but higher benefit levels):
  - ISEE below €9,360.
  - Household must not have real assets (including main dwelling) worth more than €30,000 or financial assets worth more than €6,000 for single-person households, €8,000 for couples, and €10,000 for three-person households (increasing by €1,000 per additional family member).
  - Benefits calculated based on a top-up formula.
  - Welfare transfers are fully subtracted.
  - Assuming 50 percent under-declaration of financial assets.
  - Note: if INPS could verify financial assets with the “national register of financial accounts”, the cost would be substantially lower.
- INPS simulation results:
  - Cost: estimate of a potential RC program at €12 billion per year.
  - Coverage: more than 2 million households, or 4.3 million individuals.
  - Average benefits to households: €6,000 per year.
  - Distribution: close to 70 percent of resources transferred to households in the poorest two deciles; benefits homogeneously distributed geographically.
  - Withdrawal rate (participation tax or price effect): would range between 81–92 percent for different groups given gradual phase-out design, adversely affecting incentives.

### Personal income taxation in Italy — overview and key statistics (¶18)
- IRPEF (personal income tax) structure:
  - Progressive tax scale with a starting rate on the first earned euro of 23 percent and a top tax rate of 43 percent for income exceeding €75,000.
  - Additional regional addizionali IRPEF: 1.23 percent to 3.33 percent.
  - Additional local addizionali IRPEF: 0 to 0.9 percent.
- High tax burden indicators:
  - Implicit tax rate on labor in Italy: 43.2 percent (second highest in the EU).
  - Share of personal income tax in total taxes: 41 percent.
  - Progressivity: steep increase between the second and third taxable income brackets due to statutory rate rise from 27 to 38 percent and phasing out of the €80 in-work tax credit.
  - Ratio of social security contributions to GDP: 13.4 percent (2 percentage points higher than the EU average).
  - Average tax wedge for a single person earning an average income: 47.9 percent (OECD average: 35.9 percent).
- IRPEF 2016 tax schedule:
  - ≤15000: 23%
  - 15000–28000: 27%
  - 28000–55000: 38%
  - 55000–75000: 41%
  - ≥75000: 43%
- Relatively narrow base and deductions:
  - Large set of tax deductions and tax credits on labor income (6 percent of GDP).
  - Largest item: ‘tax credits for income source’ (first bracket subject to 23 percent; no zero-tax bracket).
  - National Income Tax Bonus (in-work tax credit): equal to €80 per month; starts with minimum annual gross salary of €8,000; decreases proportionally for annual gross salaries between €24,600 and €26,600; cost to budget about €9 billion per year (about ½ percent of GDP).
  - Other credits: family tax credits, tax credits for retirees, voluntary life insurance, education, mortgage interest payments, medical expenses, refurbishment, among others.
  - Compliance gap on personal income taxes: about 2 percent of GDP.

### EUROMOD simulation of a flatter personal income tax regime (¶19–20)
- Authorities’ 2019 Draft Budget Plan measures (context):
  - Extend ‘regime forfettario’ for self-employed: earnings threshold €65,000 (previously €25,000–€50,000 depending on activity), apply 15 percent tax rate, eliminate some asset/personnel cost requirements.
  - From 2020: new regime for self-employed with earnings between €65,000 and €100,000 taxed at 20 percent.
  - Number of beneficiaries to increase from around 950 thousand to over one and a half million.
  - Budgetary cost about €1.8 billion (0.1 percent of GDP) at peak.
  - Draft budget also introduces permanent tax break on reinvested profits and changes several tax incentives.
- Simulated flatter PIT reform (not in draft budget) assumptions:
  - Personal income tax rates simplified to only two rates: 15 percent and 20 percent.
  - Different income thresholds tested for when rates apply (ranging from €30,000 to €80,000).
  - Tax allowance of €3,000 for low-income households.
  - Existing set of tax deductions and credits maintained in baseline simulation unless base broadening applied.
- Simulation results:
  - Cost estimated at €80–90 billion (about 5 percent of GDP) depending on income threshold, unless accompanied by base broadening.
  - With partial base broadening for a threshold of €80,000 on family income, Baldini and Rizzo (2018) estimate net cost of €50 billion (about 3 percent of GDP).
  - Distributional impact: reform would be highly regressive, benefiting mostly the well-off in the top decile and resulting in a higher Gini coefficient.

### Reform principles for comprehensive PIT reform (¶21)
- Preconditions:
  - Any lowering of personal income tax rates should occur within a comprehensive review of the overall tax-benefits structure.
  - Reform must be consistent with a fiscal consolidation path that ensures Italy’s public debt declines firmly (¶2).
  - Before lowering rates, the tax base should be broadened with high-quality measures to ensure revenues in line with the recommended fiscal path.
- Core principles of comprehensive reform:
  - (i) maintain progressivity and support labor supply;
  - (ii) ensure tax neutrality;
  - (iii) enhance tax certainty;
  - (iv) broaden the tax base.

*Source: IMF staff chapter text.*

### 22.      Income redistribution considerations should be balanced with adequate labor-supply

### 22.      Income redistribution considerations should be balanced with adequate labor-supply incentives

### Effective marginal tax rates and labor-supply incentives
- Statutory tax rate reductions could encourage labor supply but would be regressive under the current distribution of marginal effective tax rates (across income percentiles, see text chart).
- The effective marginal tax rate schedule should be progressive.
- The large variability of effective marginal income tax rates that derive from regulatory stratifications (e.g., from the design of the €80 measure) distorts labor supply decisions. Statutory tax rates and income support programs should therefore be reshaped such that effective marginal tax rate hikes are smoothed. This would encourage labor supply.
- Italy has the lowest labor supply of married women among EU countries driven in part by a tax credit for non-working spouses. Consideration should be given to better targeted measures for secondary earners, especially low-income ones. For instance, the family (“dependent spouse”) tax credit could be replaced with a tax credit for households if both spouses are employed. This so-called working family tax credit or in-work tax credit for secondary earners could be increasing with the number of children.
- Available evidence suggests adopting in-work tax credits for low income earners has sizable positive impacts on female labor-force participation and aggregate employment (Saez, 2002; De Mooij, 2008). For Italy, Colonna and Marcassa (2015) find that replacing the dependent-spouse tax credit with an in-work tax credit would increase the married-women participation rate by 3 percentage points.

- Complementary measure (footnote):
  - A complementary measure to reduce the labor tax wedge would be to consider reducing the employers’ social security contribution rate closer to the EU average (see Andrle et al, 2018b). Given wage rigidities and being in a monetary union with major trading partners, it could reduce labor costs (and producer prices, including those of exports) and increase labor demand in the short term. However, the impact on employment and output may be longer lasting if it is accompanied by a shift in the tax burden toward non-labor income (VAT and property taxes) that is less distortionary. Reductions in employers social security contributions should further be coordinated with pension policies since, over time, these would lead to a decline in pension benefit outlays through the Notional Defined Contributions scheme.

### Tax neutrality and proposed tax-rate changes
- Reforms should ensure tax neutrality, so that decisions are based on economic merits and not tax reasons.
- Currently, dividend income, which is subject to corporate income taxation (at 24 percent), is charged a final withholding tax of 26 percent, yielding a combined tax rate of 43–43.8 percent. This is close to the top marginal personal income tax rate of 43 percent that applies to profit withdrawals by sole proprietorships under the dual tax regime for unincorporated businesses, or IRI, and thus has maintained neutrality across legal forms and business income.
- The 2019 Draft Budget introduces lower effective tax rates for artisans, small businesses and professionals, and plans to cancel the IRI regime.
- All else equal, reducing the corporate income tax rate to 15 percent and the top personal income tax rate to 20 percent (applied also to sole proprietors) in the case of full implementation of the flatter tax regime would result in a combined tax rate of about 37 percent for dividend income, compared to a top marginal personal income tax rate of 20 percent.
- Harmonizing tax rates across different types of investment income is advisable. This example further illustrates the need for a systemic approach to income tax reform.

### Tax uncertainty and frequency of changes
- The frequency of tax changes is relatively high in Italy compared to other G20 countries and contributes to tax uncertainty.
- Renewing temporary measures with varying conditions is prevalent, which can generate uncertainty when their expiry date is either unclear or not credible. Such uncertainty risks creating a “hold-up problem”, where firms under-invest until the uncertainty is resolved.

### Broadening the tax base and enforcement
- High quality measures are needed to broaden the tax base: addressing large compliance and policy gaps, rationalizing tax expenditures, stricter enforcement, and introducing a modern tax on primary residences based on updated cadastral values would help broaden the tax base.
- On average and over the period 2013-15, the tax gap–which measures the extent of tax evasion, or the difference between theoretical and actual tax revenue—was estimated by the Italian Ministry of Economy and Finance at around €109 billion per year, over 6 percent of GDP.
- The stock of unpaid tax and social security contribution debt in 2016 was €614 billion (about 35 percent of GDP), out of which only €31 billion (less than 2 percent of GDP) is deemed collectible.
- Permanent reductions in arrears require deep institutional (enforcement) and behavioral (compliance) changes for tax administration and tax payers, respectively. Recurrent tax amnesties could generate some quick returns but undermine the compliance culture and effectiveness of tax administration.

### Conclusion — policy recommendations and fiscal framing
- Italy needs a modern social safety net and a lower tax wedge on labor as part of a growth-friendly and inclusive fiscal consolidation package. Using the tax-benefit microsimulation model for the European Union (EUROMOD), the note argues:
  - Italy needs a well-designed and adequately-funded guaranteed minimum income program for the poor—one that is not time bound; caps benefits at levels that avoid welfare dependence; includes gradual benefit phase-outs, income disregards, or conditional in-work benefits to incentivize regular work; and has adequate controls to prevent abuse with effective local administrative capacity. It is recommended to introduce this program in the context of a comprehensive review of the social welfare system, by gradually scaling up the inclusion income program, at a cost of about ½ percent of GDP, and rationalizing other anti-poverty schemes.
  - Any consideration to flatten personal income tax rates should be undertaken in the context of a comprehensive review of the income taxes and the structure of benefits. It needs to be consistent with a fiscal consolidation path that ensures Italy’s public debt declines firmly, maintain progressivity and support labor supply, safeguard tax neutrality, enhance tax certainty, and broaden the tax base.

*Source: IMF staff discussion in chapter “22. Income redistribution considerations should be balanced with adequate labor-supply incentives.”*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1941.pdf_