Towards a Two-rate VAT in Italy: Distributional and Welfare Effects

This paper assesses the redistributive effects of two recent adjustments of indirect taxes in Italy, in 1995 and in 1997, in view of the convergence to a two-rate VAT structure. Although reducing the number of tax rates from four to three in 1997, we find that the two adjustments did not cause significant distributional effects. The authors argue that a two- rate VAT could have replaced the 1997 adjustment providing the same revenue, redistributing the tax burden from less rich to richer households and significantly inreasing welfare.