A Working Paper (WP) from International Monetary Fund (IMF) has proposed four tax reforms options for Italy on the basis of microsimulation studies.

Captioned 'Toward a Comprehensive Tax Reform for Italy' WP has concluded that "inefficiencies in the Italian tax code point to the benefits of a comprehensive base-broadening tax reform".

The four reforms options are: 1) Lowering the tax burden on labour income through a personal income tax reform; 2) Designing a base-broadening VAT reform to limit negative distributive effects; 3) Updating the property valuation system for the property tax to address equity concerns and increase revenue collection; and 4) Preparing a revenue-neutral tax reform that shifts revenue from labour income to consumption and property to benefit low and middle-income households the most.

Released on 21st February 2020, WP observes that tax expenditures are very costly in terms of foregone revenue. The resulting erosion of the tax base has increased the need for governments to rely on higher marginal rates, especially on labour income. Inefficiency and the overall complexity of the tax system have contributed to a significant compliance gap that further erodes revenue collection. To facilitate broad-based growth and to put the current very high level of public debt on a firm downward path, Italy faces revenue needs that cannot be addressed with a narrow tax base.

WP has assessed the revenue and distributive implications of a comprehensive tax reform for Italy with the objective of reducing the tax burden on labour income toward the EU average. As put by WP authors, " Reform options are guided by the principles of reducing complexity, broadening the tax base, and lowering marginal tax rates ".

The Italian tax system is characterized by considerable complexity. This is reflected in the numerous options for taxpayers such as substitute taxes and special regimes, the multiple deductions and credits from the personal income tax, and more generally the range of tax expenditures that include reduced rates and exemptions for most taxes. All these contribute to the erosion of the tax base that results in significant revenue loss. For the personal income tax, the largest identified tax expenditures cause an estimated revenue loss of about 5 percent of GDP. For the value-added tax (VAT), reduced rates and exemptions contribute to a policy gap in

Italy estimated at about 22 percent of the total tax liability (CASE, 2018), 3 as compared to 16.5 percent for the EU average. It results in a revenue loss estimated at about 3½ percent of GDP.