Simone Pellegrino

Personal Income Tax Reforms: a Genetic Algorithm Approach

Given a settled reduction in the present level of tax revenue, and by exploring a very large combinatorial space of tax structures, in this paper we employ a genetic algorithm in order to determine the ‘best’ structure of a real world personal income tax that allows for the maximisation of the redistributive effect of the tax, while preventing all taxpayers being worse off than with the present tax structure. We take Italy as a case study.

On the Aronson-Johnson-Lambert Decomposition of the Redistributive Effect

Recently van De Van, Creedy and Lambert (2001) and Lambert and Urban (2005) have reconsidered the original Aronson, Johnson and Lambert (1994) decomposition of the redistributive effect in order to properly evaluate personal income tax reforms, when sequential income groups do not concern exact equals. Lambert and Urban (2005) decompose the Atkinson-Plotnick-Kakwani index into three terms. We utilize this decomposition in choosing the optimal bandwidth and suggest to consider not only the highest vertical contribution to the redistributive effect, but also the horizontal inequity due to the reranking of the mean post-tax income among groups. Findings are applied to Italian data with respect to both individual nominal incomes and equivalent household incomes

What Explains the Redistribution Achieved by the Italian Personal Income Tax? Evidence from Administrative Data:

We analyze the Italian personal income tax (PIT) in the light of the different tools available to the government to achieve income redistribution. We focus in particular on three mechanisms: marginal tax rates, deductions, and tax credits. Exploiting an extended version of the standard Pfähler decomposition, we estimate the contribution of each of these three tools to the overall redistributive effect of the PIT using administrative data on more than 1.3 million individual tax returns. Our estimates suggest that more than half of the total PIT redistributive effect is due to the two most important tax credits (the tax credit for employment and the tax credit for retirement income), while the marginal rates schedule contribution is about 40 percent. On the contrary, most of the itemized expenditures do not show any sizable impact on redistribution.

Horizontal Inequity Estimation: The Issue of Close Equals Identification

This paper focuses on the estimation of horizontal inequity, remaining within the framework of the close equals groups approach started by Aronson, Johnson and Lambert (1994), and systematised by Urban and Lambert (2008). Within the framework of the close equals groups the choice of bandwidth, which determines the intervals of close equal income units, is fundamental. Following the existing literature on the redistributive effect decomposition, we propose a new criterion for the identification of the optimal bandwidth: in this article the identification of close equals groups is mainly oriented to the estimation of horizontal inequity. Our criterion intends to be a contribution to empirical work that focuses on comparing the effects of different tax systems on a particular population of taxpayers. In order to test the robustness of the new criterion, different tax systems, characterised by different degrees of tax progressivity, are applied to Italian and Polish personal income tax data. Our results suggest the bandwidths, chosen according to our methodology, are more stable than those obtained by maximising potential vertical effects.

The decomposition of the redistributive effect into vertical effect, horizontal effect and reranking: the state of the art and the application to the Italian case

Recently van De Van, Creedy and Lambert (2001) and Urban and Lambert (2008) have reconsidered the original Aronson, Johnson and Lambert (1994) decomposition of the redistributive effect in order to identify the optimal bandwidth that should be used in decomposing the redistributive effect, when groups with close pre-tax incomes are considered. The methodology proposed by van De Van, Creedy and Lambert (2001) suggests choosing as the optimal bandwidth the one which maximizes the ratio between the potential effect V (which depends on the bandwidth) and the actual redistributive effect RE (which is invariant). Urban and Lambert (2008) discuss a set of further possible decompositions of the redistributive effect together with a decomposition of the Atkinson-Plotnick-Kakwani index into three terms. Making use of a microsimulation model based on microdata provided by the Bank of Italy in its Survey on Households Income and Wealth in the year 2006, in this paper we investigate the three most important decompositions of the redistributive effect applied to the 2006 and 2007 Italian personal income tax. Moreover, we throw some more light on the behavior of these decompositions in order to look for criteria to choose a bandwidth which allows the three different definitions of potential redistributive effect to assume values which can be as coherent as possible, and, in the meanwhile, to catch as much as possible of the potential vertical effect. We suggest looking for the bandwidth where the ratio between the maximum distance among the different potential vertical effect definitions and the minimum among the different potential vertical effects is minimum.