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 paper, we exploit the new data available from the European
Central Bank's Distributional Wealth Accounts (DWA) to reconstruct the
distribution of capital income in Italy by accounting for
heterogeneous returns to capital. With respect to previous estimates,
we find that capital income is more concentrated along the income
distribution and the Italian tax system is more regressive with lower
tax rates hinging on the top 7%. We show that such rates are
remarkably lower than those suggested by an optimal taxation approach
and we provide estimates for revenues and inequality reductions that
could be attained by applying (higher) optimal rates either to capital
income or wealth while controlling for various degrees of behavioral
responses. These results provide a direction for revenue-increasing
and inequality-reducing tax reforms in Italy.
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