Between 1990 and 2026 Gross wages of private sector employees in Italy decreased by an average of 6,6% in real terms, while their distribution has become increasingly unequal. In this scenario, personal income tax reforms have played a growing role in containing disparities, doubling the tax's redistributive capacity. This is what emerges from the new Working note published by the Parliamentary Budget Office (UPB), which analyzes over three decades of evolution of the Italian labor market and tax system, highlighting however that taxes alone are no longer sufficient to support the lowest incomes.
Falling real wages and a more fragmented labor market
The analysis of the UPB, carried out using INPS administrative data and an IRPEF microsimulation model, captures a labor market that has changed profoundly since the 1990s. Not only have average wages lost purchasing power, but their distribution has become more unequal.
The worsening mainly affects the lowest income bracket, penalized by the spread of part-time work, the increase in different types of contracts, and a growing segmentation between production sectors and professional qualifications. These factors have widened wage dispersion, making it more difficult to reduce inequality through economic growth alone.
Irpef has compensated for part of the inequalities
In this context, the personal income tax system has assumed an increasingly important role in rebalancing disposable income. According to the study, the index that measures the redistributive capacity of Irpef has gone from 0,028 in 1990 to 0,065 in 2026, more than doubling its effect.
Much of this result comes from the tax reforms introduced in recent years, in particular from the 2014 Irpef bonus and the 2025 reform, which transferred part of the social security contributions intended for employees into the tax system. These measures reduced the burden on low- and middle-income earners, while higher-income earners saw an increase in the effective tax burden, partly due to the so-called fiscal drag, the tax burden caused by inflation and the lack of indexation of tax parameters.
The contribution of the reforms explained by the graph
The graph developed by the UPB shows how the growth in redistributive capacity is primarily attributable to interventions aimed at low- and medium-income workers. The reforms dedicated to this group explain, in fact, over 115% of the overall increase of redistributive capacity. On the contrary, interventions concerning higher incomes produce a negative effect equal to approximately -37%, partially reducing the overall result.
Fiscal drainage and changes in the composition of the working population also provided a positive contribution, amounting to approximately 7% e 14 %The second part of the graph also highlights how the main driver of the increase in redistribution was the strengthening of the progressivity of the tax, while the reduction in the average rate, resulting from the tax breaks introduced over time, only partially offset this effect.
A new methodology to separate the effects
One of the study's innovative elements is the methodology developed by the UPB to distinguish the various causes of the redistributive evolution of personal income tax. The analysis separates four components: reforms targeting low- and middle-income earners, interventions targeting higher-income earners, fiscal drag, and changes in the labor market and income distribution. This approach allows us to measure how much of the change is due to legislative choices and how much is attributable to inflation or employment trends. According to the UPB, Approximately 80% of the increase in redistributive capacity recorded over the last thirty years is directly attributable to personal income tax reforms.
The limits of the redistributive model
The study emphasizes, however, that the tax system is now showing signs of saturation. Strengthening redistribution has been achieved mainly through easing the tax burden on low- and middle-income earners and concentrating a growing share of the tax burden on middle- and high-income taxpayers. This approach makes the system more vulnerable to the effects of inflation, accentuates differences in treatment between employees and other taxpayers, and fails to address the structural causes of wage stagnation.
Public spending is also needed to support incomes
For the Parliamentary Budget Office, further increases in redistribution through Irpef now appear limitedPossible strategies should include broadening the tax base by combating tax evasion, revising tax breaks that reduce revenue from the ordinary system, and implementing policies to boost wage growth.
Alongside fiscal interventions, the UPB concludes, it will be increasingly necessary to resort to income support instruments financed by public spending, since the use of personal income tax alone appears to have reached much of its redistributive potential.
