Italy continues to record low employment rates, in particular among youth, older people and women. With an overall unemployment rate that has been reduced to below the EU average over the past decade, the employment gap vis-à-vis most other EU countries reflects low participation. After a brief review of how taxation can affect the labour market, the analysis in this Country Focus provides a dynamic picture of taxation in Italy, with a special focus on taxation of labour and its interaction with social transfers. The potentially distortive effects of the Italian tax-benefit system on labour market outcomes are discussed in the light of the available evidence. It is concluded that, while in the medium-term the overall tax burden in Italy is set to remain relatively heavy, given the need to reduce the very high government debt ratio, there may be scope for revenue-neutral and efficiency-enhancing tax reforms that help boost employment. In any case, some difficult policy choices are needed if raising labour market participation and employment, particularly of women, is to become a policy priority in Italy.