Tax Reforms and Fiscal Stabilisation in Italy

Abstract

The paper by Maria Rosaria Marino, Daniela Monacelli and Stefano Siviero proposes a methodology for evaluating the implications of changes in tax structure for automatic stabilisation. The approach is similar to the one used in the recent literature on optimal monetary policy rules. The features of the proposed approach are illustrated with an application to a reduced-scale steady-state version of the Bank of Italy Quarterly Econometric Model. The stabilising properties of different tax schemes are appraised on the basis of the variance of output oscillations associated with the income elasticities from various tax schemes; the variance is estimated by means of long-horizon stochastic simulations around a steady-state growth path. The results suggest that there is a value of the tax elasticity parameter which minimises the output gap variance. Higher values do not considerably worsen the stabilisation properties of the tax system while lower values may result in a sharp loss of stabilising properties. Recent reforms do not seem to have significantly modified the stabilisation properties of the Italian tax system. Despite the non-trivial differences in the methodology, the authors’ findings are consistent with those from other studies. In particular, there may be no trade-off between output stabilisation and efficiency. Furthermore, a relatively high degree of automatic fiscal stabilisation tends to do a good job in keeping cyclical fluctuations under control when demand shocks prevail, whereas the opposite applies when supply shocks prevail.