2024/26 | LEM Working Paper Series | ||||||||||||||||
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Tackling the regressivity of the Italian tax system: An optimal taxation framework with heterogeneous returns to capital |
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Matteo Dalle Luche, Demetrio Guzzardi, Elisa Palagi, Andrea Roventini, Alessandro Santoro |
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Keywords | |||||||||||||||||
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Optimal tax; Inequality; Capital Income; Wealth tax
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JEL Classifications | |||||||||||||||||
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D31, E01, H2, H21
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Abstract | |||||||||||||||||
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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.
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