Taxing income or consumption: macroeconomic and distributional effects for Italy

Diego d'Andria, Jason DeBacker (), Richard Evans, Jonathan Pycroft and Magdalena Zachlod-Jelec ()
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Jonathan Pycroft: European Commission - JRC, https://joint-research-centre.ec.europa.eu/index_en
Magdalena Zachlod-Jelec: European Commission - JRC, https://joint-research-centre.ec.europa.eu/index_en

No 2021-13, JRC Working Papers on Taxation & Structural Reforms from Joint Research Centre

Abstract: We study a set of tax reforms introducing a budget-neutral tax shift in Italy, from labour income to consumption taxes. To this end we use a microsimulation model to provide the output with which to estimate the parameters of tax functions in an overlapping-generations computable general equilibrium model. In doing so we make marginal and average tax rates bivariate non-linear functions of capital income and labour income. The methodology allows for the representation of the non-linearities of the tax and social benefit system and interactions between capital and labour incomes. The linked macro model then simulates labour supply, consumption and savings in a dynamic setting, thus accounting for behavioural and general equilibrium effects within a life-cycle optimization framework. Our simulations show that a tax shift made by cutting personal income tax rates might bring significant efficiency gains in Italy, with limited regressive effects, notwithstanding the revenue-compensating increase in consumptions taxes.

Keywords: computable general equilibrium; overlapping generations; taxation; microsimulation; Italy; tax shift (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-eec, nep-mac, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:ipt:taxref:202113

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