The 2007 Personal Income Tax Reform in Italy: Effects on Potential Equity, Horizontal Inequity and Re-ranking

According to Kakwani and Lambert (1998), an equitable income tax should respect three axioms related to each taxpayer’s tax liability, average tax rate and post-tax income: whenever taxation determines unequal tax treatments among equals or modifies pre-tax ordering, it influences the potential vertical effect of the tax through three types of inequity. Following the authors’ measurement system, we investigate changes in axiom violations due to the 2007 Italian personal income tax reform, that introduced significant changes in the tax structure. Our microsimulation model uses as input data those provided by the Bank of Italy in its Survey on Households Income and Wealth in the year 2006; estimates of the distribution of taxpayers are very close to the Ministry of Finance official statistics. The analysis considers both the individual and equivalent household gross income distribution and evaluates the decomposition with and without surtaxes. Main findings suggest that both in the 2006 and 2007 tax system most of the overall violations concern the axiom demanding the average tax rate to be a non decreasing function with respect to the gross income; the axiom requiring richer taxpayers to pay higher tax liabilities than poorer ones and the axiom requiring the tax to do not introduce re-rankings in the pre-tax income order present minor violations. The 2007 reform enhances both the potential redistributive effect, that is the one that could be obtained without axiom violations, and the axiom violations: the net result is a small positive variation of the actual redistributive effect. These phenomena appear more relevant for taxpayers than those for equivalent households. For what concerns taxpayers, the 2007 reform has modified also the composition of the three axiom violations, that remains almost the same whenever equivalent households are considered. Finally, focusing on each decile of the income distribution, regressivities are concentrated in the bottom five deciles of the income distribution both for taxpayers and equivalent households.Personal Income Tax, Redistributive Effect, Horizontal Inequity, Reranking, Microsimulation Models

The Decomposition of the Redistributive Effect and the Issue of Close Equals Identification

Urban and Lambert (2005, 2008) present an exhaustive summary and an in-depth discussion of the literature contributions about the decomposition of the redistributive effect of a tax (RE). The authors discuss the indexes available in the literature for the potential vertical effect (V), the loss due to horizontal fairness violations (H) and that due to re-rankings (R); they also introduce new indexes specifically conceived to take into account problems arising when groups of exact equals are substituted by groups of close equals. Close equals groups are generally obtained by splitting the pre-tax income distribution into contiguous intervals having the same bandwidth, so that the problem of the bandwidth choice arises. van de Van, Creedy and Lambert (2001) suggest choosing the bandwidth that maximizes the potential vertical effect V. Even looking for V maximization, we discuss a new criterion that yields a compromise between the contrasting needs of minimizing the effects of pre-tax within groups inequalities and the minimization of group average re-rankings. The criterion is then applied to evaluate the components of two decompositions: the former is the one suggested by Urban and Lambert (2005, 2008) as preferable, the latter is suggested by us on the basis of Urban and Lambert’s paving discussion. According to our simulation results, when comparing different income tax systems for a same population as well as adopting the “optimal” bandwidth, the new criterion seems to introduce lower approximation errors than the maximization of V.Income Tax, Redistributive Effect, Horizontal Inequity, Re-ranking

The Runaway Taxpayer or: Is Prior Tax Notice Effective against Scofflaws?

In this paper we study how prior tax notice (following audit and detection of tax fraud by Tax Authorities) affects individual behaviour in terms of tax compliance. We start with a very stylised theoretical framework, considering a situation in which an individual has been already audited and caught as tax evader, and knows that the Tax Authorities are looking for her to cash the due amount of taxes. We concentrate on the decision to move in order to avoid paying the bill, and derive the optimal number of times an individual should move equalising marginal costs and benefits of the decision. We then carry out an empirical analysis based on real data provided by an Italian collection agency for the period 2004-2007. Our results show that previous notice reduces the probability to move, but its cost is not large enough to correct the individual incentive to escape Tax Authorities.tax-enforcement, individual compliance decisions, prior notice

Developing a static microsimulation model for the analysis of housing taxation in Italy

In this paper we develop the first (static) microsimulation model aimed at studying the distributive impact of housing taxation on Italian households. We use as input data those provided by the Bank of Italy from its Survey on Households Income and Wealth, and discuss specific problems arising in the evaluation of cadastral income and of the Property Tax base. Our estimates of the distribution of taxpayers are very close to the Ministry of Finance official statistics; hence, our model can be seen as a reliable tool to evaluate the current distribution of housing taxation and the impact of potential tax reforms. Our simulations suggest that both Property Tax and Waste Management Tax show a moderate regressive impact with respect to household gross income, whilst the Personal Income Tax on dwellings other than the main residence is progressive. We then provide an application of our model, to study the Property Tax reform in 2008. Our findings show that all households owning the main residence gain from the 2008 reform, but tax cuts are mostly concentrated on the top three deciles of household equivalent gross income, so that the richest benefit most.Housing taxation, Microsimulation Models

FEA-Augmented Design Equations for Synchronous Reluctance Machines

The synchronous reluctance machine is an attractive substitute of induction motors and synchronous PM motors thanks to its higher efficiency and lower cost of materials, respectively. One of the main challenges relenting the adoption of these machines is the lack of a widely recognized procedure for their design. In the past, design equations were proposed for SyR machines by different authors. Those models represent a good starting point and a useful guideline for the designer, but they are far from being accurate enough in many aspects. To increase precision, different procedures based on finite element analysis were proposed over the years, but those methods have the dual downside of losing the physical insight on the effect of the various design parameters. In this work, a comprehensive design procedure based on design equations is reviewed and improved using few static FEA simulations to fix the errors of the analytical model, in order to increase the precision without reducing the generality of the model