Skip to main content
SpringerLink
Log in

Decomposing Personal Income Tax Redistribution with Application to Italy

  • Published:
The Journal of Economic Inequality Aims and scope Submit manuscript

Abstract

The rise of wealth inequalities between and within nations is sustaining the request of reforming personal income taxes in many countries. A complete evaluation of the redistributive effects of tax instruments, however, implies investigating both vertical and horizontal equity aspects. I propose an augmented decomposition of the Reynolds-Smolensky index, where the reranking term is decomposed using geometric partition techniques, in order to measure how personal income tax instruments influence vertical and horizontal equity, as well. The application of the new method to novel Italian tax files suggests that the assessment of specific tax measures and/or tax reforms depends on which criterion of equity, vertical or horizontal, is adopted. The joint consideration of vertical and horizontal equity effects is also important when evaluating selected personal income tax instruments benefiting top income individuals and the tax measures adopted during the crisis. A specific focus on the regional redistributive effects of personal income tax is an additional key feature of this paper.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Aaberge, R., Atkinson, A.B., Königs, S.: From classes to copulas: wages, capital, and top incomes. J. Econ. Inequal. 16(2), 295–320 (2018)

    Google Scholar 

  • Acciari, P.: Collezione campionaria di dati estratti dalle dichiarazioni Irpef e analisi redistributive. 12° Conferenza Nazionale di Statistica ISTAT. Rome (2016)

  • Albarea, A., Bernasconi, M., Marenzi, A., Rizzi, D.: Income under Reporting and Tax Evasion in Italy. Estimates and distributive effects. Ufficio Valutazione Impatto Senato (2018)

  • Alberini, A., Bigano, A.: How effective are energy-efficiency incentive programs? Evidence from Italian homeowners. Energy Econ. 52, S76–S85 (2015)

    Google Scholar 

  • Andrle, M., Hebous, S., Kangur, A., Raissi, M.: Italy: Toward a Growth-Friendly Fiscal Reform. IMF working paper series WP/18/59. Washington (2018)

  • Astarita, C., Maestri, V., Schmitz, M.L.: Recent Tax Reforms in Italy: the Impact on Households and Workers. Economic Brief 020 European Commission. Brussels (2016)

  • Atkinson, A.B., Brandolini, A.: Promise and pitfalls in the use of ‘secondary’ data-sets: income inequality in OECD countries as a case study. J. Eco. Lit. 39, 771–799 (2001)

    Google Scholar 

  • Atkinson, A.B., Piketty, T., Saez, E.: Top incomes in the long run of history. J. Eco. Lit. 49(1), 3–71 (2011)

    Google Scholar 

  • Atkinson, A.B., Guio, A.C., Marlier, E.: Monitoring social inclusion in Europe. Eurostat. (2017)

  • Avram, S.: Who benefits from the “hidden welfare state”? The distributional effects of personal income tax expenditure in six countries. J. Eur. Soc. Pol. 28(3), 271–293 (2018)

    Google Scholar 

  • Baldini, M., Poggio, T.: The Italian housing system and the global financial crisis. J. Hous. & Bui. Env. 29(2), 317–334 (2014)

    Google Scholar 

  • Baldini, M., Giarda, E., Olivieri, A.: A tax-benefit microsimulation model for Italy: a partial evaluation of fiscal consolidation in the period 2011-2014. Prometeia Bologna. (2015)

  • Ballarino, G., Braga, M., Bratti, M., Checchi, D., Filippin, A., Fiorio, C.V., Leonardi, M., Meschi, E., Scervini, F.: GINI Country Report: Growing Inequalities and their Impacts in Italy. Amsterdam Institute for Advanced Labour Studies. Amsterdam (2013)

  • Barbetta, G.P., Pellegrino, S., Turati, G.: What explains the redistribution achieved by the Italian personal income tax? Evidence from Administrative Data. Pub. Fin. Rev. 46(1), 7–28 (2018)

    Google Scholar 

  • Bargain, O., Callan, T., Doorley, K., Keane, C.: Changes in income distributions and the role of tax-benefit policy during the great recession: an international perspective. Fisc. Stud. 38(4), 559–585 (2017)

    Google Scholar 

  • Bazzoli, M., Di Caro, P., Figari, F., Fiorio, C.V., Manzo, M.: Estimating the Size of Income Tax Evasion in Italy. Paper presented at HMRC International Tax Gap Conference. London (2018)

  • Bitler, M., Hoynes, H.: Heterogeneity in the impact of economic cycles and the great recession: effects within and across the income distribution. Am. Eco. Rev. 105(5), 154–160 (2015)

    Google Scholar 

  • Bitler, M., Hoynes, H., Kuka, E.: Child poverty, the great recession, and the social safety net in the United States. J. Pol. An. & Man. 36(2), 358–389 (2017)

    Google Scholar 

  • Bourguignon, F., Spadaro, A.: Microsimulation as a tool for evaluating redistribution policies. J. Econ. Inequal. 4(1), 77–106 (2006)

    Google Scholar 

  • Burman, L.E., Geissler, C., Toder, E.J.: How big are total individual income tax expenditures, and who benefits from them? Am. Eco. Rev. 98(2), 79–83 (2008)

    Google Scholar 

  • Callan, T., Nolan, B., Keane, C., Savage, M., Walsh, J.R.: Crisis, response and distributional impact: the case of Ireland. IZA J. Eur. Lab. Stud. 3(1), 1–17 (2014)

    Google Scholar 

  • Card, D., Chetty, R., Feldstein, M.S., Saez, E.: Expanding access to administrative data for research in the United States. Mimeo (2010)

  • Causa, O., Hermansen, M.: Income redistribution through taxes and transfers across OECD countries. OECD Econ. Dept. WP 1453, 1–91 (2017)

  • CEPS: Income Convergence in the EU: within-country regional patterns. Brussels (2018)

  • Ceriani, L., Verme, P.: The origins of the Gini index: extracts from Variabilità e Mutabilità (1912) by Corrado Gini. J. Econ. Inequal. 10(3), 421–443 (2012)

    Google Scholar 

  • Ceriani, L., Fiorio, C.V., Gigliarano, C.: The importance of choosing the data set for tax-benefit analysis. Int. J. of Microsim. 6(1), 86–121 (2013)

  • Ceriani, L., Figari, F., Fiorio, C.V.: EUROMOD report Italy 2014-2017. November (2017)

  • Cerqueti, R., Ausloos, M.: Statistical assessment of regional wealth inequalities: the Italian case. Qual. Quan. 49(6), 2307–2323 (2015)

    Google Scholar 

  • Checchi, D., Peragine, V.: Inequality of opportunity in Italy. J. Econ. Inequal. 8(4), 429–450 (2010)

    Google Scholar 

  • Cowell, F.: Measuring Inequality. Oxford University Press, Oxford (2011)

    Google Scholar 

  • Cowell, F., Fiorio, C.V.: Inequality decompositions-a reconciliation. J. Econ. Inequal. 9(4), 509–528 (2011)

    Google Scholar 

  • Cowell, F.A., Van Kerm, P.: Wealth inequality: a survey. J. Eco. Sur. 29(4), 671–710 (2015)

    Google Scholar 

  • Dardanoni, V., Lambert, P.: Horizontal inequity comparisons. Soc Cho&Wel. 18(4), 799–816 (2001)

    Google Scholar 

  • De Agostini, P., Paulus, A., Tasseva, I.: The effect of changes in tax-benefit policies on the income distribution in 2008–2015. EUROMOD WP, N. EM6/16 (2016)

  • De Miguel, C., Labandeira, X., Löschel, A.: Frontiers in the economics of energy efficiency. Ene. Econ. 52, S1–S148 (2015)

    Google Scholar 

  • Di Caro, P.: A redistributive analysis of IRPEF using fiscal microdata. Eco. Pub. 1, 35–59 (2017)

    Google Scholar 

  • Di Caro, P.: The contribution of tax statistics for analysing regional income disparities in Italy. J. Inc. Dist. 25(1), 1–27 (2018)

    Google Scholar 

  • Diamond, P., Saez, E.: The case for a progressive tax: from basic research to policy recommendations. J. Eco. Per. 25(4), 165–190 (2011)

    Google Scholar 

  • Duclos, J.Y.: Progressivity, redistribution, and equity, with application to the British tax and benefit system. Pub. Fin. 48(3), 350–365 (1993)

    Google Scholar 

  • Duclos, J.Y.: The asymptotic distribution of linear indices of inequality, progressivity and redistribution. Eco. Lett. 54(1), 51–57 (1997)

    Google Scholar 

  • Duclos, J.Y., Araar, A.: Poverty and equity: measurement, policy and estimation with DAD. Springer Sc. Busin. Media (2007)

  • EU Commission: Taxation trends in the European Union. Eurostat Statistical Books (2017)

  • Figari, F., Fiorio, C.V.: Fiscal consolidation policies in the context of Italy's two recessions. Fisc. Stud. 36(4), 499–526 (2015)

    Google Scholar 

  • Figari, F., Iacovou, M., Skew, A.J., Sutherland, H.: Approximations to the truth: comparing survey and microsimulation approaches to measuring income for social indicators. Soc. Ind. Res. 105(3), 387–407 (2012)

    Google Scholar 

  • Figari, F., Paulus, A., Sutherland, H.: Microsimulation and policy analysis. In: Atkinson, A.B., Bourguignon, F. (eds.) Handbook of income distribution, 2141–2221, Elsevier (2015)

  • Figari, F., Paulus, A., Sutherland, H., Tsakloglou, P., Verbist, G., Zantomio, F.: Removing homeownership bias in taxation: the distributional effects of including net imputed rent in taxable income. Fisc. Stud. 38(4), 525–557 (2017)

    Google Scholar 

  • Fiorio, C.V.: Understanding Italian inequality trends. Oxf. Bull. of Eco. & Stat. 73(2), 255–275 (2011)

    Google Scholar 

  • Gordon, R.H., Kopczuk, W.: The choice of the personal income tax base. J. Pub. Eco. 118, 97–110 (2014)

    Google Scholar 

  • Institute on Taxation and Economic Policy: Who pays? A distributional analysis of the tax systems in all 50 States. Washington (2018)

  • Jäntti, M., Jenkins, S.: The impact of macroeconomic conditions on income inequality. J. Econ. Inequal. 8(2), 221–240 (2010)

    Google Scholar 

  • Jäntti, M., Pirttilä, J., Rönkkö, R.: Redistribution around the world: causes and consequences. WIDER Working Paper no. 2016/133 (2016)

    Google Scholar 

  • Jenkins, S.: Empirical measurement of horizontal inequity. J. Pub. Econ. 37, 305–329 (1988a)

    Google Scholar 

  • Jenkins, S.: Reranking and the analysis of income redistribution. Scott. J. Pol. Eco. 35(1), 65–76 (1988b)

    Google Scholar 

  • Jenkins, S., Brandolini, A., Micklewright, J., Nolan, B.: The great recession and the Distribution of Household Income. Oxford University Press, Oxford (2013)

    Google Scholar 

  • Longford, N.T., Pittau, M.G., Zelli, R., Massari, R.: Poverty and inequality in European regions. J. App. Stat. 39(7), 1557–1576 (2012)

    Google Scholar 

  • Matsaganis, M., Leventi, C.: The distributional impact of austerity and the recession in southern Europe. South Eur. Soc. & Pol. 19(3), 393–412 (2014)

    Google Scholar 

  • Matthews, S.: Trends in Top Incomes and their Tax Policy Implications. OECD Taxation Working Paper Series No. 4. Paris (2011)

  • MEF: Rapporto Annuale sulle Spese Fiscali 2017. Rome (2017)

  • MEF: Bollettino delle Entrate Tributarie 2017. Rome (2018)

  • Monti, M.G., Pellegrino, S., Vernizzi, A.: On measuring inequity in taxation among groups of income units. Rev. Inc. Weal. 61(1), 43–58 (2015)

    Google Scholar 

  • Morger, M., Schaltegger, C.A.: Income tax schedule and redistribution in direct democracies–the Swiss case. J. Econ. Inequal. 16(3), 413–438 (2018)

    Google Scholar 

  • Mussida, C., Parisi, M.L.: Immigrant groups’ income inequality within and across Italian regions. J. Econ. Inequal. 16(4), 655–671 (2018)

    Google Scholar 

  • Neri, A., Rondinelli, C., Scoccianti, F.: The marginal propensity to consume out of a tax rebate: the case of Italy. Bank of Italy Rome. (2017)

  • OECD: Insights from income distribution and poverty in OECD regions. Paris (2014)

  • Onrubia, J., Picos-Sanchez, F., del Carmen Rodado, M.: Rethinking the Pfahler–Lambert decomposition to analyse real-world personal income taxes. ITAX. 21, 796–812 (2014)

    Google Scholar 

  • Paulus, A., Figari, F., Sutherland, H.: The design of fiscal consolidation measures in the European Union: distributional effects and implications for macro-economic recovery. Ox. Eco. Pap. 69(3), 632–654 (2016)

    Google Scholar 

  • Peiró-Palomino, J.: Regional well-being in the OECD. J. Econ. Inequal. 17(2), 195–218 (2019)

    Google Scholar 

  • Pellegrino, S., Vernizzi, A.: Decomposing the Redistributive Effect of Taxation to Reveal Axiom Violations. Unito Department of Economics and Statistics WP Series No. 049. (2018)

  • Pellegrino, S., Piacenza, M., Turati, G.: Assessing the distributional effects of housing taxation in Italy: a microsimulation approach. CESifo Eco. Stud. 58(3), 495–524 (2012)

    Google Scholar 

  • Pesole, A., Raitano, M.: Distribuzione dei redditi nelle regioni italiane e scale di equivalenza. Ita. J. Soc. Pol. 3, 321–358 (2012)

    Google Scholar 

  • Piazzalunga, D., Di Tommaso, M.L.: The increase of the gender wage gap in Italy during the 2008-2012 economic crisis. J. Econ. Inequal. 17(2), 171–193 (2019)

    Google Scholar 

  • Pissarides, C.A., Weber, G.: An expenditure-based estimate of Britain's black economy. J. Pub. Eco. 39(1), 17–32 (1989)

    Google Scholar 

  • Ravallion, M.: Inequality and poverty when effort matters. Econometrics. 5(50), 1–19 (2017)

    Google Scholar 

  • Reynolds, M., Smolensky, E.: Post-fiscal distributions of income in 1950, 1961, and 1970. Pub. Fin. Quar. 5(4), 419–438 (1977)

    Google Scholar 

  • Schneider, F., Raczkowski, K., Mróz, B.: Shadow economy and tax evasion in the EU. J. Mon. Laun. Con. 18(1), 34–51 (2015)

    Google Scholar 

  • Seidl, C., Pogorelskiy, K., Traub, S.: Tax progression in OECD countries: an integrative analysis of tax schedules and income distributions. Springer (2012)

  • Shorrocks, A.: Decomposition procedures for distributional analysis: a unified framework based on the Shapley value. J. Econ. Inequal. 11, 99–126 (2013)

    Google Scholar 

  • Tromp, A.: The effects of a hybrid negative income tax on poverty and inequality: a microsimulation on the UK and Italy. EUROMOD WP, N. 5/17 (2017)

  • Tyson, J.: Reforming tax expenditures in Italy: what, why, and how? IMF working paper series WP/14/7. Washington (2014)

  • Urban, I.: Contributions of taxes and benefits to vertical and horizontal effects. Soc. Cho. Wel. 42(3), 619–645 (2014)

    Google Scholar 

  • Urban, I.: Impact of taxes and benefits on inequality among groups of income units. Rev. Inc. Weal. 62(1), 120–144 (2016)

    Google Scholar 

  • Verbist, G., Figari, F.: The redistributive effect and progressivity of taxes revisited: an international comparison across the European Union. FinanzArchiv. 70, 405–429 (2014)

    Google Scholar 

Download references

Acknowledgements

I am particularly grateful to the Editor-in-chief Frank Cowell, the Associate Editor Markus Jäntti and three anonymous reviewers whose input improved the paper substantially. I wish to thank Carlo V. Fiorio and Fabrizia Lapecorella for the support. I am grateful to Andrea Brandolini, Michele Costa, Fernando Di Nicola, Francesco Figari, Silvia Giannini, Marco Manzo, Giorgio Mongelli, Maria Teresa Monteduro, Mauro Mussini, Jorge Fernandez Onrubia, Simone Pellegrino, Giacomo Pignataro, Ivica Urban, Achille Vernizzi, and the participants at the XXIX Siep Conference and the XXX Villa Mondragone International Economic Seminar for comments and suggestions. I wish to thank SOGEI for the support with the data. The views expressed in the paper are those of the author and do not reflect those of the institution of affiliation.

Author information

Authors and Affiliations

  1. Department of Finance; Ministry of Economy and Finance, Via dei Normanni 5, 00184, Rome, Italy

    Paolo Di Caro

Authors
  1. Paolo Di Caro
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Paolo Di Caro.

Additional information

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Electronic supplementary material

ESM 1

(DOCX 92 kb)

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Di Caro, P. Decomposing Personal Income Tax Redistribution with Application to Italy. J Econ Inequal 18, 113–129 (2020). https://doi.org/10.1007/s10888-019-09425-7

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10888-019-09425-7

Keywords

JEL Classification

Search

Navigation