Exploring optimal taxation to tackle the regressivity of Italy’s

Income and wealth inequality have been steadily rising in most developed economies since the 1980s, driven by wealthier households earning higher returns on their capital. Research has shown that wealthier individuals tend to invest in more profitable assets, which amplifies inequality over time

In this paper, Matteo Dalle Luche, Demetrio Guzzardi, Elisa Palagi, Andrea Roventini and Alessandro Santoro exploit the new data available from the European Central Bank’s Distributional Wealth Accounts to reconstruct the distribution of capital income in Italy, accounting for heterogeneous returns to capital. The study also shows that tax rates on capital income for the wealthiest individuals are significantly lower that what is suggested by optimal taxation models. The paper therefore explores potential reforms to address the regressivity of the Italian tax system at the top, that could increase revenues and reduce inequality.

KEY FINDINGS

• Capital income is highly concentrated, with returns to wealth increasing from 2.5% for the bottom 90% to 5% for the wealthiest 10%.
• The Italian tax system is more regressive than previously estimated, with the wealthiest 7% paying disproportionately lower tax rates.
• Policy simulations, grounded on an optimal taxation framework and different levels of behavioral responses, show that increasing taxes on the richest individuals —up to 60% for the top 0.1%— could reduce inequality, enhance tax fairness, and boost public revenues.
• To counter tax avoidance strategies used by the wealthiest, the feasibility of a wealth tax targeting individuals with net wealth exceeding €450,000 (the top 7%) is recommended.
• These results provide a direction for tax reforms in Italy that would boost tax revenues and decrease inequality. The research also feeds into the global debate on implementing a global minimum wealth tax on the ultra-rich, as presented by Gabriel Zucman at the G20 at the G20 summit in Rio de Janeiro.

Effective tax rates under different optimal taxation scenarios

AUTHORS

• Matteo Dalle Luche, Center for Economic Studies (CES), LMU Munich, Germany
• Demetrio Guzzardi, Institute of Economics and l’EMbeDS, Scuola Superiore Sant’Anna, Pisa, Italy
• Elisa Palagi, Institute of Economics and l’EMbeDS, Scuola Superiore Sant’Anna, Pisa, Italy
• Andrea Roventini, Institute of Economics and l’EMbeDS, Scuola Superiore Sant’Anna, Pisa, Italy
• Alessandro Santoro, Department of Economics, Management and Statistics, University of Milano-Bicocca, Italy

MEDIA CONTACT

•  press[at]wid.world