Investigating the Incidence of Value Added Tax on Households Income: New Evidence from Italy

Abstract

This paper analyses the incidence of the Value Added Tax (VAT) on Italian households income. To address this question, we developed a non-behavioural microsimulation model, the Value Added Tax Simulation Model (VATSIM-DF II). The goals of VATSIM-DF (II) are to estimate actual and expected VAT revenues, assess the VAT incidence on households disposable income, and simulate the distributional effects of changes in fiscal policies in Italy. Compared to existing models, the main achievements of this study are: (i) the creation of a unique original dataset, which includes tax register data; (ii) the implementation of a matching procedure, based on Tax Register data, which outperforms other data fusion strategies used in the existing literature. These innovations allow us to create a reliable and unique dataset to simulate changes in VAT and to produce results consistent with the most updated macroeconomic data. We tested our model, at current VAT legislation, and we show the VAT burden on Italian households confirming the regressivity of VAT. Finally, we analyse the effect of a revenue neutral reform, with two VAT rates, which applies the reduced VAT rate also to female and babies sanitary products.