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

Author

Listed:
  • Nicola Curci

    (Bank of Italy)

  • Marco Savegnago

    (Bank of Italy)

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.

Suggested Citation

  • Nicola Curci & Marco Savegnago, 2019. "Shifting taxes from labour to consumption: the efficiency-equity trade-off," Temi di discussione (Economic working papers) 1244, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1244_19
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    References listed on IDEAS

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    5. Nico Pestel & Eric Sommer, 2017. "Shifting Taxes from Labor to Consumption: More Employment and more Inequality?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 63(3), pages 542-563, September.
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    Cited by:

    1. Christl, Michael & Papini, Andrea & Tumino, Alberto, 2020. "Heterogeneity in effective VAT rates across native and migrant households in France, Germany and Spain," GLO Discussion Paper Series 723, Global Labor Organization (GLO).
    2. Cristina Cirillo & Lucia Imperioli & Marco Manzo, 2021. "The Value Added Tax Simulation Model: VATSIM-DF (II)," Working Papers wp2021-12, Ministry of Economy and Finance, Department of Finance.
    3. D'ANDRIA Diego & DEBACKER Jason & EVANS Richard W. & PYCROFT Jonathan & ZACHLOD-JELEC Magdalena, 2021. "Taxing income or consumption: macroeconomic and distributional effects for Italy," JRC Working Papers on Taxation & Structural Reforms 2021-13, Joint Research Centre.
    4. Nicola Curci & Marco Savegnago, 2021. "A new universal child allowance in Italy: equity and efficiency concerns," Questioni di Economia e Finanza (Occasional Papers) 636, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    microsimulation model; redistribution; efficiency; taxation; progressivity;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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