Personal Income Tax Design for Italy : Lessons from the Theory

IRPEF – the Italian personal income tax – is the leading tax in terms of share of total government revenue in Italy. After a decade of reforms, the tax-benefit structure still exhibits several critical issues that need to be addressed. The paper presents a tax-benefit design proposal for Italy based on the more recent achievements of the theory. Firstly, it provides a brief overview of optimal taxation theory as it relates to personal income tax, particularly the latest critical developments which argue in favour of a schedule of increasing marginal rates. Secondly, the literature on optimal taxation is used to analyse, from the point of view of efficiency, the different possible ways of implementing transfers to low-income earners. Then the issue of the choice of tax unit is examined in terms of its efficiency as well as its (horizontal and vertical) equity implications. Lastly, the paper presents a proposal for a package of reforms concerning the structure of personal income tax and family benefits aimed at addressing the critical issues affecting the current system