Tax and benefit reforms to support employment and inclusiveness and address poverty in Italy

This paper assesses Italy’s 2019 tax and benefit reforms, analyses hypothetical reforms and proposes a reform package that balances goals of reducing poverty, encouraging employment and fiscal sustainability. Using the OECD’s Tax-Benefit and the EUROMOD microsimulation models, it shows that the new guaranteed minimum income scheme introduced in 2019 significantly strengthens Italy’s low income protection system but can also financially discourage recipients from working. The debated flattening of personal income tax rates would do little to improve work incentives, but would drastically cut tax revenues and increase inequality, by reducing the progressivity of the personal tax system. A proposed reform package that maintains progressive personal income tax rates, gradually withdraws low-income support and provides additional benefits for low-wage earners would make inroads into poverty and inequality while encouraging formal work. This paper accompanies and extends the results of the in-depth chapter of the OECD 2019 Economic Survey of Italy (2019[1]) on social and regional disparities.