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Accounting for tax evasion profiles and tax expenditures in microsimulation modelling. The Betamod model for personal income taxes in Italy

  1. Andrea Albarea  Is a corresponding author
  2. Michele Bernasconi  Is a corresponding author
  3. Cinzia Di Novi  Is a corresponding author
  4. Anna Marenzi  Is a corresponding author
  5. Dino Rizzi  Is a corresponding author
  6. Francesca Zantomio  Is a corresponding author
  1. Ca’ Foscari University, Italy
Research article
Volume 8(3) Winter 2015
Cite this article as: A. Albarea, M. Bernasconi, C. Di Novi, A. Marenzi, D. Rizzi, F. Zantomio; 2015; Accounting for tax evasion profiles and tax expenditures in microsimulation modelling. The Betamod model for personal income taxes in Italy; International Journal of Microsimulation; 8(3); 99-136. doi: 10.34196/ijm.00123
14 figures and 14 tables

Figures

Figure 1
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The construction of Betamod.
Figure 2
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Net-to-gross conversion (Module 2).
Figure 3
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Distribution of taxpayers by classes of reported income.
Figure 4
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Distribution of reported income by classes of reported income.
Figure 5
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Income source tax credit as a proportion of reported income (%).
Figure 6
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Tax credit for dependent family members as a proportion of reported income.
Figure 7
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Distribution of tax evasion rates by type of income (tax evaders only, in percentage).
Figure 8
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Average tax evasion rates by type of income and by true gross income classes.
Figure 9
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Unreported income by classes of true gross income (millions of euros).
Figure 10
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Cumulative distributions of taxpayers by (true) gross and reported income classes (thousands of euros).
Figure C.1
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Total tax deductions as a proportion of reported income (%).
Figure C.2
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The 19% tax credits as a proportion of reported income (%).
Figure C.3
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Social insurance contributions paid by self-employed individuals as a proportion of reported income (%).
Figure C.4
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The 19% tax credit for healthcare expenses as a proportion of reported income (%).

Tables

Table 1

The largest PIT deductions and tax credits (fiscal year 2010).

Description (Value millions of Euros) Number of beneficiaries (thousands of persons) percent of Gdp
Deductions
Social insurance contributions paid by selfemployed individuals 17,603 11,991 1.13
Cadastral value of the main residence 8,283 17,166 0.53
Voluntary contributions to private pension plans 1,905 822 0.12
Tax credits
Tax credit for specific income sources 41,887 36,426 2.70
Tax credit for dependent family members 11,375 12,624 0.73
Tax credit for healthcare expenditures 2,585 15,002 0.17

  1. Source: Ministry of Economy and Finance, http://www1.finanze.gov.it/analisi_stat/index.php?tree=2011

Table 2

Deductions: identification of potential beneficiaries.

Deductions Potentially beneficiaries Data source
Social insurance contributions paid by self-employed individuals having self-employed income It-Silc
Cadastral value of the main residence be the owner’s of main residence It-Silc
Voluntary contributions to private pension plans those who reported to pay contributions to private pension plans It-Silc
Legal alimony payments for spouse those who reported to pay alimony It-Silc
Personal care services and disability aids identified by the estimated probability of healthcare spending Multiscopo
Social insurance contributions paid for domestic help i) presence of children
ii) having health care expenses		 It-Silc
Donations to religious institutions (*) It-Silc
Others (*) It-Silc

  1. Note: (*) Due to lack of information in the data, beneficiaries are mainly identified among the taxpayers with the higher probability of receiving other tax advantage; this is motivated by anecdotal evidence that the probability of claiming specific tax reliefs increases in the number of other tax reliefs claimed. In order to increase variance some beneficiaries have been randomly chosen

Table 3

Tax credits: identification of potential beneficiaries.

Deductions Potentially beneficiaries Data source
19% tax credits
Healthcare expenses identified by the estimated probability of healthcare spending Multiscopo
Mortgage interest payments on main residence i) be the homeowner’s of main residence
ii) have a mortgage loans for the purchase of the main residence		 It-Silc
Life insurance premium he/she have life insurance expenses Shiw
Secondary and tertiary education i) he/she is studying
ii) have children attending high school or university		 It-Silc
Funeral expenses (*) It-Silc
Mortgage interest payments on other properties i) be the homeowner’s of main residence and other properties It-Silc
Annual enrollment to sports facilities i) he/she is doing sport
ii) have children between 6 and 18		 It-Silc
Rent for resident students have children attending university and not living within the same residence as the referent individual It-Silc
Social/community/home care expenses identified by the estimated probability of healthcare spending Multiscopo
Charitable donations (*)
Real estate brokerage expenses i) be the homeowner’s of main residence
ii) have a mortgage loans for the purchase of the main residence or others properties		 It-Silc
Others (*)
55% tax credits
For energy conservation’s interventions i) be the homeowner’s of main residence
ii) have expenses for energy conservation’s interventions		 It-Silc Shiw
41%-36% tax credits
House refurbishments i) be the homeowner’s of main residence
ii) have expenses for the refurbishment of buildings		 It-Silc
20% tax credits (*)
Lump sum tax credit
For tenants subject to controlled rent and for employees relocating closer to work i) be for rent
ii) have gross income less than € 30,987.41
iii) having age between 20 and 30 years old and gross income less than € 15,493.71		 It-Silc
Security sector tax credit i) be employee
ii) have employment reported income less than € 35,000		 It-Silc
Others (*)

  1. Note: (*)Due to lack of information in the data, beneficiaries are mainly identified among the taxpayers with the higher probability of receiving other tax advantage; this is motivated by anecdotal evidence that the probability of claiming specific tax reliefs increases in the number of other tax reliefs claimed. In order to increase variance some beneficiaries have been randomly chosen.

Table 4

Components of gross income: Betamod and It-Silc.

Individuals Households
Number of individualsa Average gross incomeb Number of householdsa Average gross incomeb
BETAMOD IT-SILC BETAMOD IT-SILC BETAMOD IT-SILC BETAMOD IT-SILC
Employment income 21,179 21,382 20,229 20,110 15,133 14,887 29,237 28,884
Pensions 15,181 15,130 15,271 16,505 12,257 11,696 19,031 21,351
Self-employment income 6,728 6,882 21,876 22,095 5,955 5,762 26,098 26,384

  1. Notes

  2. a

    thousands of persons

  3. b

    millions of euros

Table 5

The grossing-up results.

Variable It-Silc weight Official tax returns Betamod weight Difference
Total Population 60,683,909 - 60,683,909 0
Males 29,499,829 - 29,499,827 −2
Females 31,184,080 - 31,184,081 1
North West 16,131,196 - 16,131,196 0
North East 11,647,123 - 11,647,123 0
Center 11,943,354 - 11,943,354 0
South 20,962,237 - 20,962,237 0
Age 0 – 14 8,841,850 - 8,841,850 0
Age 15 – 24 6,041,469 - 6,041,468 −1
Age 25 – 44 17,172,717 - 17,172,717 0
Age 45 – 64 16,394,019 - 16,394,019 0
Age over 65 12,233,854 - 12,233,855 1
Total households 25,217,462 - 25,217,462 0
North West 7,186,593 - 7,186,593 0
North East 4,993,636 - 4,993,636 0
Center 5,007,637 - 5,007,637 0
South 8,029,596 - 8,029,596 0
Total Taxpayers - 41,168,189 41,168,317 128
Males - 21,622,165 21,622,249 84
Females - 19,546,024 19,546,068 44
North West - 11,653,491 11,653,533 42
North East - 8,710,500 8,710,532 32
Center - 8,317,613 8,317,638 25
South - 12,486,585 12,486,613 28
Reported income classes
1st quintile - 8,359,593 8,357,026 −2,567
2nd quintile - 7,753,926 7,754,008 82
3rd quintile - 10,526,834 10,527,087 253
4th quintile - 7,851,917 7,852,371 454
5th quintile - 6,675,919 6,677,825 1,906
Taxpayers by main income
Employment income - 20,228,316 20,228,944 628
Pensions - 14,165,864 14,166,862 998
Self-employment income - 4,708,272 4,706,768 −1,504
Rental income from immovable property - 2,065,737 2,065,744 7
Number of taxpayers with dependent family members - 12,624,414 12,624,454 40
Table 6

Aggregate validation: main components of personal income tax and local taxes.

Number of taxpayersa Valueb
Totals Betamod Official tax returns Diff. % Betamod Value ² Official tax returns Diff. %
Gross income 41,168 - - 853,891 - -
Evaded income 14,778 - - 60,789 - -
Reported income 41,168 41,168 0.0 793,102 792,520 0.1
Deductions 13,794 13,374 3.1 21,736 21,746 0.0
Taxable income 41,097 39,894 3.0 763,086 762,185 0.1
Gross tax liability 41,097 39,078 5.2 205,213 205,613 −0.2
Tax credits 39,977 39,088 2.3 64,604 62,482 3.4
Net tax liability 31,178 30,897 0.9 147,904 149,443 −1.0
Regional income tax 31,035 30,653 1.2 8,655 8,633 0.3
Municipal income tax 25,251 25,265 −0.1 3,023 3,021 0.1

  1. Notes

  2. a

    thousands of persons

  3. b

    millions of euros

Table 7

Aggregate validation: deductions.

Number of taxpayersa Valueb
Deductions Betamod Official tax returns Diff. % Betamod Value ² Official tax returns Diff. %
Social insurance contributions paid by self-employed individuals 11,922 11,991 −0.6 17,601 17,603 0.0
Cadastral value of the main residence 16,873 17,166 −1.7 8,279 8,283 0.0
Voluntary contributions to private pension plans 803 822 −2.3 1,897 1,905 −0.4
Legal alimony payments for spouse 109 120 −9.5 742 745 −0.4
Personal care services and disability aids 147 143 2.8 537 531 1.2
Social insurance contributions paid for domestic help 522 537 −2.8 415 419 −0.9
Donations to religious institutions 95 104 −8.7 27 27 −1.8
Others 1,800 1,816 −0.9 517 516 0.1

  1. Notes

  2. a

    thousands of persons

  3. b

    millions of euros

Table 8

Aggregate validation: tax credits.

Number of taxpayersa Valueb
Deductions Betamod Official tax returns Diff. % Betamod Value ² Official tax returns Diff. %
Income source tax credit 37,852 36,426 3.9 44,475 41,887 6.2
Dependent family members tax credit 12,624 12,624 0.0 10,914 11,375 −4.0
19% tax credits
Healthcare expenses 14,855 15,002 −1.0 2,588 2,585 0.1
Mortgage interest payments on main residence 3,817 3,841 −0.6 1,146 1,147 0.0
Life insurance premium 6,437 6,520 −1.3 750 751 −0.1
Secondary and tertiary education 2,102 2,095 0.3 318 318 0.0
Funeral expenses 413 428 −3.6 119 119 −0.4
Mortgage interest payments on other properties 281 296 −5.1 80 77 3.2
Annual enrollment to sports facilities 1,506 1,522 −1.1 60 60 0.1
Rent for resident students 159 169 −6.2 51 50 1.0
Social/community/home care expenses 113 108 4.0 38 38 0.6
Charitable donations 899 915 −1.8 36 36 0.3
Real estate brokerage expenses 95 100 −4.1 16 15 1.5
Others 1,080 1,101 −1.9 83 83 −0.1
55% tax credits
For energy conservation's interventions 1,038 1,052 −1.4 1,351 1,349 0.1
41%-36% tax credits
House refurbishments 5,175 5,267 −1.8 2,242 2,243 0.0
20% tax credit 539 540 −0.1 65 65 −0.1
Others tax credits
For tenants subject to controlled rent and for employees relocating closer to work 708 713 −0.7 138 136 1.5
Security sector tax credit 375 349 7.5 50 50 0.0
Others 158 137 15.3 84 83 1.6

  1. Notes

  2. a

    thousands of persons

  3. b

    millions of euros

Table 9

Gross and net tax distribution by classes of reported income (mean values in euros).

Classes of reported income Gross tax liability Net tax liability
Betamod Official tax returns Betamod Official tax returns
under 5,000 442 453 281 229
5,000 – 7,500 1,317 1,394 613 460
7,500 – 10,000 1,851 1,938 415 492
10,000 – 12,000 2,437 2,417 826 867
12,000 – 15,000 2,998 2,993 1,384 1,426
15,000 – 20,000 4,005 3,988 2,373 2,336
20,000 – 26,000 5,363 5,359 3,745 3,673
26,000 – 29,000 6,612 6,584 5,026 4,952
29,000 – 35,000 7,979 7,966 6,403 6,401
35,000 – 40,000 10,077 9,962 8,763 8,513
40,000 – 50,000 12,634 12,439 11,452 11,169
50,000 – 75,000 18,111 18,244 17,134 17,228
above 75,000 45,707 46,799 44,166 45,551
Average 4,993 5,262 4,744 4,837
Table 10

Inequality and redistributive indices.

Individuals Equivalent households
Gini Concentration Gini Concentration
Gross income 0.4155 0.4155 0.3885 0.3885
Reported income 0.4417 0.4264 0.4060 0.3954
Taxable income 0.4478 0.4262 0.4102 0.3950
Gross tax liability 0.5107 0.4909 0.4702 0.4552
Net tax liability 0.6784 0.6508 0.6315 0.6104
Net income 0.3678 0.3662 0.3428 0.3415
Reynolds-Smolensky index 0.0493 0.0469
Kakwani index 0.2353 0.2220
Average tax rate 0.1732 0.1745
Reranking effect 0.0015 0.0013
Table 11

Kakwani indices of Personal Income Tax components.

Equivalent households
Average rate of tax components Weight of the decomposition Kakwani index
Evasion ev 0.0686 ev/(1-ev-e-d) 0.0765 πkEV 0.0945
Exemptions e 0.0104 e/(1-ev-e-d) 0.0116 πkE 0.0389
Deductions d 0.0245 d/(1-ev-e-d) 0.0273 πkD −0.0393
Tax rate schedule πkR 0.0602
Gross tax liability tg 0.2408 tg/tn 1.3797 πkTg 0.0668
Tax credits k 0.0663 k/tn 0.3797 πkK 0.3419
Tax credits for income source kis 0.0486 kis/tn 0.2782 πkKis 0.3989
Tax credits for dependent family members kdf 0.0077 kdf/tn 0.0444 πkKdf 0.5329
k19 0.0056 k19/tn 0.0323 πkK19 −0.0196
19% tax credits ko 0.0043 ko/tn 0.0249 πkKo −0.1684
Other tax credits tn 0.1745 tn/(1-tn) 0.2115 πkTn 0.2220
Net tax liability ev 0.0686 ev/(1-ev-e-d) 0.0765 πkEV 0.0945
Table 12

Average tax evasion rates by income source and geographical area (%).

Average tax evasion rate NW NE C S ITALY
Employment income 2.7 3.1 2.8 3.3 2.9
Pensions 0.0 0.0 0.0 0.0 0.0
Self-employment income 22.2 25.1 22.3 27.2 24.0
Rental income from immovable property 30.6 35.5 31.3 38.2 33.6
Total income 6.9 7.5 6.8 7.7 7.2
Table 13

Transition matrix of taxpayers from (true) gross income to reported income (%).

Classes of true gross income (thousands of euros)
0–5 5–7.5 7.5–10 10–12 12–15 15–20 20–26 26–29 29–35 35–40 45–50 50–75 >75 Total
Classes of reported income (thousands of euros) 0–5 10.47 1.51 0.79 0.33 0.57 0.33 0.11 0.01 14.11
5–7.5 6.37 0.91 0.43 0.42 0.52 0.32 0.07 0.04 9.08
7.5–10 7.13 0.60 0.49 0.34 0.39 0.11 0.08 0.02 9.15
10–12 4.38 0.71 0.50 0.25 0.06 0.11 0.04 0.01 6.06
12–15 7.66 1.25 0.31 0.08 0.17 0.09 0.04 9.61
15–20 14.26 1.64 0.24 0.19 0.09 0.05 16.50
20–26 13.43 0.72 0.43 0.12 0.11 0.01 14.82
26–29 4.06 0.51 0.12 0.08 0.01 4.78
29–35 5.34 0.37 0.23 0.06 6.01
35–40 2.38 0.31 0.05 2.75
40–50 2.64 0.30 2.94
50–75 2.25 0.02 2.26
> 75 1.95 1.95
Total 10.47 7.88 8.83 5.74 9.85 17.21 16.45 5.36 6.86 3.23 3.48 2.67 1.96 100
Table A.1
Balancing test.
Property Region
1st 2nd N-W N-E C S Sample Psuedo R2 LR test p-values Median bias % reduction in median bias
✓ ✓ ✓ Before matching
After matching		 0.013
0.000		 99.72
0.38		 0.000
0.996		 6.4
0.2		 0.969
✓ ✓ Before matching
After matching		 0.012
0.000		 42.77
1.23		 0.000
0.942		 5.0
0.1		 0.980
✓ ✓ Before matching
After matching		 0.019
0.000		 102.27
1.30		 0.000
0.935		 5.8
0.4		 0.931
✓ ✓ ✓ Before matching
After matching		 0.007
0.000		 11.84
0.07		 0.037
1.000		 6.7
0.3		 0.955
✓ ✓ ✓ Before matching
After matching		 0.001
0.001		 2.50
2.27		 0.776
0.810		 4.2
0.3		 0.929
✓ ✓ ✓ Before matching
After matching		 0.007
0.000		 14.36
0.20		 0.013
0.999		 6.0
0.4		 0.933
✓ ✓ ✓ Before matching
After matching		 0.004
0.000		 9.31
0.63		 0.097
0.987		 7.0
0.2		 0.971
✓ ✓ ✓ ✓ ✓ Before matching
After matching		 0.004
0.001		 4.14
1.46		 0.529
0.917		 4.6
0.8		 0.824
✓ ✓ Before matching
After matching		 0.042
0.000		 136.58
1.95		 0.000
0.857		 6.1
0.1		 0.984
✓ ✓ Before matching
After matching		 0.029
0.000		 122.41
0.51		 0.000
0.992		 10.0
0.2		 0.980

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