Shifting taxes from labour to consumption: the efficiency-equity trade-off

Nicola Curci () and Marco Savegnago

No 1244, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We assess how a tax shift from labour to consumption affects the Italian tax-benefit system in terms of the efficiency-equity trade-off. We designed three budget-neutral scenarios, where the revenues generated by increasing VAT rates are used to finance some alternative cuts in direct taxes. In all the scenarios, the trade-off is confirmed: efficiency increases but equity decreases. However, the scenario best positioned in the trade-off is the one providing an increase in labour income tax credits: in this case, the increase in efficiency is the highest and the decrease in equity is the lowest. We also account for the distribution of winners and losers following this reform. We show that, even if the losers are mostly concentrated in the lowest part of the equivalent income distribution, the recently introduced minimum income schemes provide these households with a benefit that is much higher than the loss generated by the tax shift.

Keywords: microsimulation model; redistribution; efficiency; taxation; progressivity (search for similar items in EconPapers)
JEL-codes: C15 C63 H22 H23 H31 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-eur, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1244_19

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