Equity and efficiency aspects of Italian debt reduction

This paper examines the distributional and efficiency effects of different debt reduction schemes in Italy. To finance a given deficit reduction path, we introduce the so-called Eurotax and endogenously adjust either the consumption tax rate or lump-sum transfers in order to balance the budget. The analysis is based on a numerically specified overlapping generations model of the Auerbach-KotlikofF type which distinguishes five different lifetime income classes within each age cohort. Our simulations suggest that the debt reduction in Italy will increase the welfare of future generations between 1 and 3 per cent of their lifetime resources. Mainly-this is due to the implied reduction in future net tax burdens. However, factor price repercussions as well as efficiency gains might also be substantiaüy beneficial to future genera­ tions. Finally, while the Eurotax is clearly progressive, consumption taxation is revealed to be, at least in our model, regressive even in the long run.