Assessing alternative Irpef reforms using microsimulation methods

In this paper alternative reforms of present Italian personal income taxation, including a change of the tax unit and the introduction of a flat tax, are studied using a microsimulation model built on a representative sample of the Italian household population. The comparison is performed discussing efficiency and equity of each alternative. Results suggest that main critical points of a family-unit reform include a high effective marginal tax rate for taxpayers with highly elastic labour supply, namely low-income married women. Flat taxation systems would cause no efficiency improvements and a dramatic reduction of tax progressivity and a worsening of redistribution. The analysis of losers and gainers clearly highlights that the distribution of gains with family-unit and flat tax systems would be highly in favour of families in the top quintile of incomes. Among the simulations developed, an adjustment of current IRPEF, roughly along the lines suggested by the White Paper on IRPEF and family income support, would not worsen inefficiency of current personal income taxation and produce more equal distribution of disposable income.