On the Use of the Value Added Tax for Redistributive Purposes in Italy

This paper shows that a Value Added Tax (VAT) with multiple tax rates in Italy is not the most effective way to pursue redistributive aims. As the tax revenue of the Italian VAT is significantly affected by the use of reduced tax rates and exemptions, we suggest that a shift to a uniform VAT coupled with cash transfers to households with children might better achieve redistributive targets. This outcome is also robust to alternative ways of targeting cash transfers to the poorest households. We also show that a uniform VAT with cash transfers, from a distributive point of view, is preferred to the extensive use of the zero rate on specific goods and services. Further improvement in the distributional results could even be achieved by considering that a uniform VAT may significantly reduce VAT evasion due to the difference of tax rates applied to the intermediate stages.