Assessing the distributional effects of housing taxation in Italy: A microsimulation approach

The presence of extensive housing subsidies characterizes the current Italian tax system as inefficient. In this article, we study whether inefficiency is the price to be paid to improve equity, by assessing the distributive impact of housing taxation on households' well-being. We concentrate on the Personal Income Tax (PIT) on the main residence, and compare current provisions of the Tax Code with alternative approaches which consider the imputed rent (IR) from owner-occupied dwellings, and would make the tax system neutral with respect to the allocation of wealth among different assets. Holding revenues constant at the current level, we assess the distributional consequences of the IR approach in terms of several alternative scenarios. Our results suggest that the current tax system is as inefficient as it is inequitable. In particular, by including IR from owner-occupied dwellings as a component of the PIT gross income, we find that overall, inequality is reduced, while contemporaneously increasing efficiency in the allocation of wealth. Moreover, considering changes in tax liabilities for individual taxpayers, we show that taxing IRs will favour the young and penalize the elderly.