Does the Personal Income Flat Tax fit with Economic Growth and Inequality in Italy?

The political debate within several developed and developing countries questioned over the profitability of introducing a “flat-tax” on households’ income to reduce the tax burden, simplify the tax system and boost the economic growth. The main concern is related to the direct, indirect and induced income redistribution effect that could be generated by the reform of the tax system and thus generate a final impact on income below the forecasts. In this perspective, this study provides a quantification of how the introduction of the flat rate tax on income in Italy could affect the Italian economic system. The analysis is carried out through a static Computable General Equilibrium model calibrated on the Italian Social Accounting Matrix where households are broken down by income deciles. Then three policy scenarios are analysed assuming different tax rates and different hypothesis on the policy funding by the government. No simulation shows a trade-off between growth and inequality, while a negative effect on real GDP occurs, coupled with an uneven effect on households disposable income.