ITaxSIM

ITaxSIM – Italian TAXation Simulation Model – is a static micro-simulation model developed by the Italian Treasury Department (Ministry of Economy and Finance) of the for the evaluation of the distributive effects of fiscal reforms.

ITaxSim is based on the Italian Survey on Income and Living conditions (IT-SILC), the first available fiscal year being the 2007. The survey is a representative sample of the Italian population and contains detailed information on net earnings, together with a large set of socio-demographic characteristics at both the individual and the household level.

The model is based on a iterative algorithm that recovers, for each individual in the sample, gross earnings from net earnings, creating a one-to-one mapping between the former and the latter through the Italian fiscal legislation coded in the model.

ITaxSim simulates the most important Italian taxes – the Social Security Contributions, the Personal Income Tax, the Value Added Tax, Real Estate taxes, Excise Duties, etc. – and the most relevant benefits, such as family-related allowances and the main means-tested benefits. Each fiscal policy is simulated through a specific module that contains all the legislative aspects of that policy for a given fiscal year, allowing for a great detail in the analysis of the effects of each tax (and benefit) component.

A satellite module of ITaxSim – LavSim – provides the changes in the expected household labour supply after a given fiscal reform, including the effects on income distribution and tax revenues.

LavSim is a structural microeconometric model of labour supply based on a discrete approach to the choice problem¹.The main outcome of LavSim are the probabilities of each working hours alternative, defined as a function of the disposable income and other individual and household characteristics. These probabilities are then used to compute the expected labour supply and the labour supply elasticity on both the intensive and extensive margin.

ITaxSim and LavSim jointly allow for a comprehensive evaluation of any structural reform of the Italian fiscal system. Indeed, ITaxSim accounts for the effects of the reform on both the household and the government budget constraint (i.e. the distributive and budgeting effects), whilst LavSim accounts for the effect of the reform on the supply-side of the labour market (i.e. the efficiency effects).

¹ A detailed description of the methodology can be found in Van Soest, A. (1995), ‘Structural models of family labor supply: a discrete choice approach’, Journal of Human Resources, vol. 30, pp. 63–88.