From Personal to Indirect Taxation: A General Equilibrium Approach

Abstract

The tax reform that came into force in Italy in 1973–74 was the result of a consistent effort in order to realize a rational scheme founded on certain tax principles, i.e. effective income as a tax base, transparency and progressivity among others². Even if its final outcome was somewhat less ambitious than expected, actually the reform led to a share of direct taxes above 50%, mostly due to the personal income tax (IRPEF), as opposed to the previous Italian fiscal system which was largely founded on the indirect taxes. Nevertheless, the tax reform was achieved in a time of changing ideologies and of upheaval in the economic and social system: after so much effort, it came about just when the principles which it was based upon were coming under discussion. In fact direct taxation was seriously questioned, and under the impulse of changed environmental conditions, opinion moved heavily in the opposite direction away from direct taxation. As far as IRPEF is concerned, its high revenue, paradoxily, was surely responsible for the most critical reflections. Among the specific factors, which contributed in reducing the limits of tolerance of the fiscal burden on those classes actually affected by the tax, one can note:

• i) the enormous reduction in the purchasing power of money, which led the real tax rates upwards;

• ii) heavy tax erosion and tax evasion, both of them negative features of IRPEF as far as equity is considered: one could perhaps wonder whether IRPEF is now a badly designed special tax rather than a general one;

• iii) the urgent need for yield, implied by the dynamics of public expenditure, which until recently prevented even partially recovering fiscal drag.

This work was undertaken under the auspices of grant number 89.051120.10 from C.N.R. We are grateful to Tom Rutherford for letting us use his MPS.GE algorithm.