2024/26 LEM Working Paper Series

Tackling the regressivity of the Italian tax system: An optimal taxation framework with heterogeneous returns to capital

Matteo Dalle Luche, Demetrio Guzzardi, Elisa Palagi, Andrea Roventini, Alessandro Santoro
  Keywords
 
Optimal tax; Inequality; Capital Income; Wealth tax
  JEL Classifications
 
D31, E01, H2, H21
  Abstract
 
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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