Tackling the Regressivity at the Top of the Italian Tax System: An Optimal Taxation Framework With Heterogeneous Returns to Capital

In this work, we exploit the new data available from the European Central Bank's Distributional Wealth Accounts to reconstruct the distribution of capital income in Italy by accounting for heterogeneous returns to capital. We find stark disparities in returns to wealth: average rates rise from 2.5% for the bottom 90% to 5% for the top 10% of the Italian wealth distribution. With respect to previous estimates, our results show that capital income is more concentrated along the income distribution and the tax system is more regressive at the top, with lower tax rates hinging on the top 7% and declining more rapidly than previously reported. Finally, we simulate different tax reforms in an optimal taxation framework calibrated on Italian data with varying behavioral elasticities. Ceteris paribus, the results indicate scope for higher top tax rates on either income or wealth to reduce inequality while boosting tax revenues.