A problem that has led to the discussion on Italian fiscal policy

The IRPEF, Italy's tax system, is known for its progressive nature, where taxes are directly proportional to income. Over the past years, fiscal policy has had a significant impact on tax revenues, with a reduction of 24.4 billion euros. This is mainly due to the fiscal reforms that have compensated for much of the 'fiscal drag'.

However, the persistent issue is represented by the 'fiscal drag', which occurs when nominal income grows in line with inflation but not with real income growth. This phenomenon has led to discussions about reducing the impact of 'fiscal drag' for workers. Sources indicate that a scenario where the state maintains constant fiscal pressure through wage indexing, without real income growth, estimates an effect of 30.8 billion euros, while another method, more appropriate for measuring the higher tax revenues actually registered as a result of price and wage increases, estimates an effect of 15.6 billion euros.

Recent inflation has brought the public's attention to the phenomenon of 'fiscal drag' (tax drain) on the IRPEF, i.e., the increase in tax pressure due to nominal income growth even without real income growth.

What is the fiscal drag? Consider a worker whose nominal income grows in line with inflation. The purchasing power of the worker remains unchanged, but the actual increase will shift part of his income onto taxed brackets with higher tax rates, thereby increasing the tax burden. Additionally, deductions, remaining fixed in nominal value, will constitute a smaller portion of the taxable amount. In this example, the definition of 'fiscal drag' is clear: the 'fiscal drag' is the greater amount collected by the state compared to what it would have collected if there had been an equal increase in prices and incomes.

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