Building and running a computable general equilibrium tax model of Italy

In dealing with computable general equilibrium modelling, this thesis builds and runs a computable equilibrium (CGE) tax model for Italy, with the aim of policy analysis. It demonstrates in considerable detail the methodology to incorporate a fiscal extension to the national comparative-static computable general equilibrium model of Italy. The output is a model featuring a detailed modelling of a full range of direct and indirect taxes, enabling the evaluation of alternative proposal for tax reforms. Within the fiscal extension, a comprehensive Value-Added-Tax (VAT) framework has been developed, which accounts for weaknesses of the current European VAT system, such as the taxation of trade and the taxation of the public bodies and the exemptions in the public interest. In addition, a special emphasis has been given to sectors national accounts, with detailed equations describing revenue and expenditure items. The contribution this thesis makes is to fill the existing gap in the Italian CGE literature, as the model is designed for the Ministry of Economy and Finance, intended to provide practical policy recommendation. In using the model for policy analysis, a static general equilibrium methodology for evaluating alternative industrial and fiscal reforms is presented. Two illustrative simulations are performed. First, the economic impact of the shutdown of the ILVA Taranto steel-plant is assessed, giving new insights on the Italian industrial policy. The top-down regional dimension, together with the multi-sectoral supply-demand interaction and the multi-production structure of the economy make the model especially well-suitable for the assessment of industrial policy, at national, sectoral and regional level. Simulation results show a negligible economic damage at national level, with changes in the macro variables driving sectoral results. At regional level, when direct and indirect effects on regional economic activities from the removal of the plant are taken into account, it is not always the case that Italian regions suffer from the removal of the ILVA plant. Second, in response to calls for a simplification of the current EU VAT system, and of the fiscal consolidation need faced by Italy, a redesign of the VAT system is considered. Using the developed VAT model, an equalising VAT rate reform is performed. The simulation suggests that a phase-broadening is desirable, as results show a welfare gain resulting from the implemented policy.