Confiscatory tax rates: intended and unintended effects

• In Event: Wage Taxation and Employment

Abstract

This paper examines the intended and unintended effects of implementing confiscatory tax rates on public sector salaries in Italy. Two significant reforms are analyzed: the introduction of a salary cap at €291,000 in 2011 and a subsequent reduction to €240,000 in 2014, both with a 100% tax rate on earnings above these thresholds. The primary aim of these reforms was to contain public expenditure and promote a more modest administration.

The study explores various impacts of these reforms, including cost containment in the public sector, increased retirement rates, changes in turnover, reduction in earnings inequality, and potential demotivation of managers. The analysis is supported by historical perspectives on income inequality and optimal taxation theories.

Administrative data from the INPS archive (Italian social security institute) is used to assess the effects of the salary cap. The study employs a treatment dummy to identify individuals affected by the cap and examines outcomes such as yearly remuneration, retirement probability, and mobility between public and private sectors.

The findings suggest that while the reforms achieved some of their intended goals, such as reducing wage inequality and containing public expenditure, they also led to unintended consequences like increased retirement rates and potential adverse selection in the public sector workforce.

Authors

• Carlo Fiorio, University of Milan

• Francesco Figari, University of Eastern Piedmont