Abstract

This paper aims to investigate the decline of disposable income experienced by Italian citizens since the outbreak of the international financial crisis, and to suggest a potential solution for its return to pre-crisis levels. Data shows that from 2000 to 2013, real disposable income has gradually decreased, causing a worsening of living conditions for Italian citizens. This indicates, on the one hand, an increase in the number of people living on a lower living standard compared with the pre-crisis years and, on the other hand, an increase in the budget deficit due to a decrease in tax revenue collected by the Italian government caused by a contraction of consumption. The analysis presented in this paper is based on the System Dynamics (SD) methodology. More specifically, a causal model is initially developed and subsequently transformed into a simulation model that captures the dynamic relationship between the decline in disposable income and the actual taxation system and respective revenue. Therefore, particular attention is devoted to taxation. By definition, when net taxes increase, disposable income decreases. The paper proposes a shift toward a system based mainly on a progressive consumption tax that aims to mitigate the trade-off between the government’s need for tax revenue and the citizenry’s need for higher disposable income. The result of the SD simulation shows that this reform would promote economic growth and re-launch the country’s competitiveness. Explicitly, the SD simulation shows that a radical reform of the taxation system would expand the tax base, relieve low-income families, (potentially) reduce tax evasion, and help in restoring the disposable income of Italian citizens.