The Universal allowance: distributive effects and interaction with personal income tax reform
This Focus Paper (in Italian) analyses the effects of the introduction from March 2022 of the single Universal allowance for dependent children and the concomitant abrogation of family allowances and tax credits for children up to 21 years of age (infographic).
After a brief description of the new allowance (UA) and the financial effects associated with its introduction, we first provide an analysis that illustrates the operation of the new programme for family types and offers a comparison with existing programmes. The analysis highlights the role – in determining the amount of UA benefits – of the number and type of children, the work status of the head of household, household assets, the number of income earners in the family and the Citizenship Income.
With the help of the tax-benefit micro-simulation model of the Parliamentary Budget Office, we then extend the analysis to the entire population and examine the redistributive effects of the introduction of the UA. These effects are also assessed together with the impact of the changes to personal income taxation introduced with the 2022 Budget Act, which have been comprehensively described and assessed in a previous publication of the Parliamentary Budget Office (“La revisione dell’Irpef nella manovra di bilancio“, Flash no. 5, December).
Based on estimates produced using the PBO’s tax-benefit micro-simulation model, the gross cost of the UA is €18.2 billion, in line with the official assessments given in the Technical Report. Net of the abolition of family allowances (FA), tax credits for dependent children (DCC) and other smaller programmes, the reform distributes some €6.8 billion in additional resources to households with dependent children. About 77 per cent of the children affected by the reform benefit from a net increase in transfers, which averages €672. This translates into an average increase in beneficiaries’ household disposable income of around 3 per cent.
The UA is a universal programme. The households that benefit the most from its introduction are those that did not qualify for benefits under the FA and/or DCC programmes (the self-employed and those with insufficient taxable income). The average benefit per child is around €1,200. Since the UA decreases more slowly as income increases compared with family allowances, the greatest benefits for payroll employees are enjoyed by those whose equivalent economic status indicator (ISEE) exceeds €12,000.
The reform brings greater benefits for large families. With the new allowance, a single-income household with a head of household who is payroll employee with four children and an ISEE of €15,000 receives about €1,700 more per child than under the previous system. The benefit per child declines to €1,250, €1,100 and €1,000, respectively, for families with three, two and one child.
The modification of the reference indicator for calculating benefits for dependent children – from income (household for the FA and individual for the DCC) to the ISEE – plays a significant role in determining the impact of the reform. The main effects include the influence of household assets in determining the level of the UA: other conditions being equal, the UA decreases – down to a minimum – as household wealth increases (if it exceeds the deductibles provided for in the calculation mechanism for the ISEE). The relatively large weight of the wealth component in the ISEE may not reflect actual differences in the economic condition of households and may raise new problems connected to possible disincentives to saving or, above all, the large distortions created by the current structure of cadastral income. All other conditions being equal, two households that differ in cadastral income by just one euro would receive a UA that differs by 65 cents.
The overall absolute gain (in average equivalent euros) from the introduction of the UA and the personal income tax reform is greatest for households in the highest income brackets. As a proportion of income, however, the changes appear clearly progressive. This effect is almost exclusively linked to the extension of dependent child transfers to include households that did not receive FA or DCC benefits, given that the impact of the personal income tax reform tends to be neutral.
Text of document (in Italian)
Infographic (in Italian)
Abstract (in Italian)
