Italy: Selected Issues

IMF Staff Country Reports, February 6, 2019

Source details

Uses the tax-benefit microsimulation model for the European Union (EUROMOD) to evaluate possible reforms to modernize Italy’s social safety net and to lower the tax wedge on labor.
Focuses on Italy’s social safety net centered on pensions and the elderly, an array of income support schemes, and a heavy tax burden falling on labor income.
Simulates the cost of a modern safety net using EUROMOD.
Provides an overview of Italy’s personal income tax regime and simulates the cost of moving toward a flatter regime previously proposed by the government coalition.
Concludes that 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.

Significant scope exists to improve Italy’s system of taxes and transfers to promote growth and inclusion, given the current emphasis on pensions and the elderly and the heavy tax burden on labor income.
Reform simulations include:
- Cost estimates for a modernized social safety net using EUROMOD.
- Cost estimates for moving toward a flatter personal income tax regime.
The paper discusses key reform principles related to personal income tax and social transfers, including considerations of means testing, withdrawal rates, tax neutrality, and tax allowances.

Modernize the social safety net to:
- Better target income support across age groups beyond the elderly.
- Streamline and rationalize existing income support schemes.
Lower the tax wedge on labor to:
- Reduce the heavy tax burden falling on labor income.
- Support labor market participation and promote growth and inclusion.
Consider a move toward a flatter personal income tax regime while weighing distributional and fiscal costs identified in EUROMOD simulations.
Apply reform principles emphasizing tax neutrality, careful design of tax allowances, and attention to withdrawal rates and means testing to avoid adverse incentives.

Income tax systems; Labor; National accounts; Personal income; Personal income tax; Tax allowances; Taxes.
Keywords highlighted in the paper include: GMI program, in-work tax credit, inclusion income program, income support, ISCR, Italy, labor income, means testing, redistribution consideration, stability Law, tax rate, tax system, taxable income, welfare system, withdrawal rate.

Italic: IMF Staff Country Reports — Italy: Selected Issues (February 6, 2019).