1 “Tax Gap and Redistributive Aspects across Italy” Alessandra Braiotta*, Alfonso Carfora*, Rosaria Vega Pansini* + , Stefano Pisani* This version: July 2014 (This is a very preliminary version. Please do not quote without authors’ permission) Resumè Abstract ......................................................................................................................................................... 1 Introduction ................................................................................................................................................... 2 An overview of theoretical approach............................................................................................................. 3 Methodological issues in tax gap measurement ............................................................................................ 4 The decomposition of tax gap by gross profit and wages ......................................................................... 5 Bottom up approach to decompose the ‘top-down’ tax base ..................................................................... 7 Propensity score matching and tax evasion estimation ............................................................................. 8 Data ............................................................................................................................................................... 9 Main results ................................................................................................................................................. 10 Decomposition of IRAP BIND................................................................................................................ 10 Estimation of Tax evasion of self-employees through propensity score analysis ................................... 12 Concluding remarks..................................................................................................................................... 17 References ................................................................................................................................................... 19 Keywords: Tax gap estimation, primary and secondary distribution of income, propensity score matching. JEL codes: C52, D33, H23, H26, H83. Abstract The aim of the paper is twofold: first, we contribute to the debate on the estimation of tax gap proposing a novel methodology to empirically assess and disaggregate the (total) tax gap; second, we analyze the effects of tax evasion in terms of primary distribution of income. The novelty of the paper relates to the methodology used to estimate tax gap based on an original integration of the topdown and the bottom-up approach. In fact, top-down approach, based on the comparison and cross- checking (matching) between national accounts and administrative fiscal data, is employed to obtain the estimation of the total gap in the tax base (Braiotta et al., 2013). The bottom-up approach, based on results from fiscal audits, is used to derive single components of the tax gap related to single taxes and different taxpayers (Feinstein, 1999; Danish Tax and Customs Administration, 2006; IRS, 2012). Furthermore, the use of micro data from fiscal audits allows to examine how tax evasion modifies the progressivity of the tax system as well as vertical and horizontal equity in the distribution of income. The analysis is conducted for Italy at the regional level in order to analyze the territorial distribution of total tax gap. * Italian Revenue Agency. The authors are solely responsible for any remaining errors. The opinions expressed in this article are the author’s own and do not necessary reflect the view of the Italian Revenue Agency. +Corresponding author: rosariavega.pansini@agenziaentrate.it