Bankitalia simulations

Irpef and tax wedge, here are the households that gained the most from the cut

The Via Nazionale institute assessed how the effect of these interventions is distributed among households, sorted according to their equivalised disposable income (i.e. adjusted for household size and composition)

by Redaction Rome

1 June 2024

Intelligenza artificiale, Panetta (Banca d'Italia): Cambiamenti per due lavoratori su tre

3' min read

Key points

The simulations of the Via Nazionale institute .
With the tax rate restyling, household disposable income grows by 1.5% on average in 2024
Where the biggest changes occur
2% of taxpayers under the EUR 35,000 threshold
In order to maintain the solutions introduced in 2024 in the coming years, coverage must be found

3' min read

The budget manoeuvre for 2024, is highlighted in Bankitalia's annual report 2023, has allocated the most significant share of resources to a number of interventions that reduce the tax and contribution burden for Italian households. For 2024, the contribution rate paid by employees has been reduced by 7 percentage points for annual salaries of EUR 25,000 or less, and 6 points for those between EUR 25,000 and EUR 35,000. These values,' the report goes on to say, 'compare with an ordinary pension contribution rate of 9.19 per cent. The decontribution does not affect the pension rights of the beneficiaries. In addition, for the three-year period 2024-26, working mothers with at least three children (at least one of whom is under the age of 18) benefit from a total contribution exemption up to a maximum of €3,000 per year (bonus mamme); for 2024 only, the measure also applies in the presence of two children (at least one of whom is under the age of 18).

less than 10 years).

Also for 2024 only, in implementation of the enabling act for tax reform, the number of IRPEF brackets is reduced from four to three: the lower rate of 23 per cent also applies to incomes between 15,000 and 28,000 euro (instead of 25 per cent). The employment deduction increases from EUR 1,880 to EUR 1,955 for taxpayers with an income up to EUR 15,000. For recipients of incomes above EUR 50,000, the decrease in the tax due as a result of these measures (EUR 260) is cancelled out by a reduction of the same amount in certain deductions that may be due.

The simulations of the Via Nazionale institute

Using a microsimulation model, Bankitalia has assessed how the effect of these interventions is distributed among households, ordered by their equivalent disposable income (i.e. adjusted to take account of household size and composition). The new structure of social security contributions and Irpef is applied to existing personal incomes, assuming that it does not significantly affect labour supply decisions or prices or wages in the current year.

With restyled rates, household disposable income grows by 1.5% on average in 2024

The simulations indicate that changes in contribution rates (including those affecting working mothers) and Irpef lead to an increase in household disposable income compared to the previous legislation of 1.5 per cent on average in 2024. Two-thirds of the increase is attributable to measures affecting social security contributions and the remainder to changes to Irpef.

Where the greatest variations occur

Almost 75 per cent of households benefit from an increase in disposable income of more than 1 per cent. The largest changes (up to 2.4 per cent, on average) occur in two groups of households: one in the second tenth of the distribution and the other between the sixth and seventh tenths of the distribution. In the first one, households with only one low- and middle-income worker prevail, in the second one those with two workers of the same type. The interventions generate a slight reduction in the inequality of equivalent disposable incomes (the Gini index decreases by 0.3 percentage points).

The marginal effective tax rate (Ame) - defined as the change in total income taxes, social security contributions and monetary transfers that is associated with a unit increase in labour income - decreases for almost all classes of gross labour income. As income rises, however, there is a first peak near the 25,000 euro threshold (beyond which the contribution allowance is reduced by one percentage point), a second, more pronounced peak at around 35,000 euro (beyond which the allowance is cancelled out) and finally a third peak at 55,000 euro (corresponding to an Irpef taxable income of around 50,000 euro, beyond which the allowance is reduced).

2% of taxpayers under the 35,000 euro threshold

Approximately 2 per cent of taxpayers fall immediately below the 35,000 euro threshold and are subject to an Ame of more than 100 per cent: in the event of even a modest increase in earned income, these individuals would lose their entire contribution allowance and thus suffer a reduction in disposable income. An alternative calibration of measures could smooth out irregularities in the Ame profile.

For example, at unchanged costs for public finance, this would be done by a gradual reduction of the contribution relief for incomes from EUR 30,000 to EUR 35,000 and its simultaneous extension up to a threshold of EUR 39,000. Compared to the regime for the current year, on the other hand, the change would be slightly regressive.

In order to maintain the solutions introduced in 2024 over the next few years, cover must be found

The maintenance for the coming years of the measures introduced for 2024, Bankitalia concludes, would require the identification of coverage of an adequate size, certain and permanent, to avoid negative effects on public accounts, also taking into consideration the consequences of the design of the measures on labour supply. If confirmed, the relief on contributions would structurally loosen the link at an aggregate level between the pension system's revenues and outlays.

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