Optimal tax; Inequality; Capital Income; Wealth tax

D31, E01, H2, H21

In this work, we exploit the new data available from the European Central Bank’s Distributional Wealth Accounts to reconstruct the distribution of capital income in Italy by accounting for heterogeneous returns to capital. We find stark disparities in returns to wealth: average rates rise from 2.5% for the bottom 90% to 5% for the top 10% of the Italian wealth distribution. With respect to previous estimates, our results show that capital income is more concentrated along the income distribution and the tax system is more regressive with lower tax rates hinging on the top 7%. Finally, we simulate different tax reforms in an optimal taxation framework calibrated on Italian data with varying behavioral elasticities. The results show that higher optimal tax rates levied on either income or wealth of the richest can successfully reduce inequality while boosting tax revenues.