Five Issues in the Design of Income Support Mechanisms: The Case of Italy

47 Pages Posted: 6 Nov 2011  

Ugo Colombino

University of Turin - Department of Economics

Abstract

Differently from most European countries and despite the recommendations on the part of the European Commission, Italy still misses a sufficiently systematic and nationwide mechanism of income support. In this paper we want to explore the feasibility, the desirability and the features of a universal policy of minimum income in Italy. We use a microeconometric model and a social welfare methodology in order to evaluate various alternatives mechanisms. We simulate the effects and the social welfare performance of 30 reforms resulting from six versions of five basic types of income support mechanism: guaranteed minimum income (GMI), universal basic income (UBI), wage subsidy (WS) and two mixed systems: GMI+WS and UBI+WS. As welfare evaluation criteria we adopt the Gini Social Welfare function and the Poverty-Adjusted Gini Social Welfare function. All the reforms are calibrated so as to preserve fiscal neutrality. The simulation adopts a methodology that allows for market equilibrium and ensures a consistent comparative statics interpretation of the results. Universal and non mean-tested transfers (possibly complemented by wage subsidy) emerge as desirable and feasible features of the income support mechanism. In the most realistic scenarios, the social-welfare-optimal policies are a modest unconditional transfer amounting to 40% of the poverty line complemented by a 10% wage subsidy or – depending on the social welfare criterion – a more generous unconditional transfer (100% of the poverty line). The reforms can be financed by proportionally increasing the current marginal tax rates and widening the tax base to include all personal incomes. The set of universalistic policies that are preferable to the current system is very large and gives the opportunity of selecting a best reform according to many different criteria.

Keywords: design of income support mechanisms, basic income, guaranteed minimum income, wage subsidy, discrete choice, labour supply, simulation of tax reforms, equilibrium microsimulation

JEL Classification: C35, C53, H31, J22

Suggested Citation

Colombino, Ugo, Five Issues in the Design of Income Support Mechanisms: The Case of Italy. IZA Discussion Paper No. 6059. Available at SSRN: https://ssrn.com/abstract=1955399

Ugo Colombino (Contact Author)

University of Turin - Department of Economics ( email )

Via Po, 53
Torino, 10124
Italy

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