In recent years there has been a lot of talk about Salaries, tax wedge cut, Simplified Irpef and tax breaks for employees. The government promised more money in the paycheck and, in fact, many Italians have seen a slight increase in their net salary.
But there is a little-known and often underestimated effect that can nullify these benefits: the so-called tax drag, or fiscal drain. Simply put: you earn a little more, but you end up paying more taxes, even though your purchasing power (what you can actually buy) doesn't increase at all.
THEParliamentary Budget Office (Upb) has studied this phenomenon, also providing precise figures and explaining who benefits from it and who risks losing out.
Read EVEN Upb, moderate growth for Italy, but not without risks
What is the tax wedge cut?
Il tax wedge It is the difference between how much a company spends on a worker and how much the worker actually receives in his paycheck. This difference is made up of taxes and contributions that both the employer and the employee pay.
To reduce this “distance”, the government has introduced a cutting contributions which works like this:
- For those who earn up to 20 thousand euros a year, it translates into a direct bonus in the paycheck.
- For those who earn between 20 and 40 euros, it becomes a tax deduction.
This measure became permanent with the budget law 2025 and in theory it should bring more money into workers' pockets and a simpler tax system.
Salaries, Irpef 2025: what changes
In addition to the reduction of the tax wedge, the reform has Simplified me too'Irpef, the income tax in Italy. Being progressive, the more salaries increase, the higher the percentage of taxes to be paid. With the new reform, brackets they went from four to three:
- 23% for incomes up to 28 thousand euros
- 35% from 28.001 to 50 euros
- 43% over 50 thousand euros
This structure aims to reduce the tax burden on low-to-medium incomes. However, the problem is that the brackets they are not updated with inflation, that is, they do not take into account the fact that prices increase over time.
What is Fiscal Drag: Higher Salaries, But You Pay More Irpef
Fiscal drag occurs when:
- Prices rise (inflation),
- Your salary increases in euros, but only to compensate for the increase in prices, so you no longer have purchasing power,
- However, because of the fixed brackets, the state taxes you as if you had become richer.
In practice, you pay more taxes even if you haven't actually earned more.
In recent years, however, the opposite has often happened: inflation has risen sharply, while wages have remained stagnant or have increased little. In this case, purchasing power decreases, but the worker remains in the same Irpef bracket, thus paying the same taxes as before despite the economic loss.
Salaries and Fiscal Drag: How Much It Really Costs
This mechanism is not new and was not introduced by the Meloni government, but as can be read in the Upb report, with the current rules it has become more evident and burdensome. For example, if inflation were at 2%:
- In 2022, this would have meant 2,9 billion euros in additional taxes for the state.
- With the Irpef in force from 2025, the same price increase would instead generate 3,3 billion euros in extra tax revenue.
So: about 370 million euros in additional taxes just because salaries have slightly increased due to inflation.
Irpef Salaries, Fiscal Drag: Who Loses? Examples
Fiscal drag does not affect everyone equally. Most penalized are the employees, who receive the tax wedge cut. Instead, pensioners, self-employed workers and those with income from annuities are almost unaffected.
Among employees, the impact varies:
- Workers: in 2022, with inflation at 2%, taxes increased by an average of 3,2%, while in 2025 the same inflation increases taxes by about 5,5%. In euros, this goes from 67 euros more to 79 euros more.
- Employees: the increase was 1,7% in 2022 and reaches 2,3% in 2025. In euros, from 116 euros more to 141 euros more.
This means that even if wages rise to offset inflation, fiscal drag increases taxes, leaving workers with less money in their pockets.
Why Fiscal Drag Makes Paycheck Raises Less Effective
This phenomenon risks reducing the effectiveness of measures designed to help low-income earners, such as the reduction of the tax wedge and the reform of the personal income tax. When wages grow little and each increase involves a jump in taxes, workers find themselves with less money in their pockets, even if they nominally earn more.
The UPB warns that, without corrective measures, inflation combined with fiscal drag can erode the benefits over time of these measures, with possible negative effects on consumption, domestic demand and confidence in the fiscal system.
To reduce the impact of fiscal drainage, many experts suggest: update automatically the Irpef brackets based oninflation, so as to avoid small salary increases causing a jump in taxes; review the tax deductions to make them more stable in the face of rising prices; adopt more targeted fiscal policies to protect those who are most vulnerable, such as young people, women and precarious workers.
