Progressivity of personal income tax and background-related earnings advantages. Evidence from Italy and Poland

In the literature on intergenerational inequality the role of taxes is usually overlooked. In this article we try to fill this gap and inquire how the personal income tax (PIT) design affects the association between parental background and adult children’s earnings. Specifically, we analyse how this association changes when net rather than gross children’s earnings are considered and disentangle what such changes depend on: differences between pre and after taxes earnings inequality or reranking of individuals along the earnings distribution before and after taxes. To this aim, using data from EU-SILC 2011, we focus on two large European countries, Italy and Poland, with comparable levels of inequality and background-related earnings premia but very different PIT design and estimate – at both the mean and the deciles of the earnings distribution – the association between parents’ characteristics and children’s gross and net earnings. We find that in Italy the PIT reduces the magnitude of this association at the top of the distribution, while no effects emerge for Poland, and the reduction is mostly due to a decrease in earnings inequality rather than to a re-ranking of children along the distribution. Our findings are confirmed when we simulate the introduction of a ‘quasi-flat tax’ regime in Italy. This suggests that the higher the tax progressivity, the higher the backgroundrelated inequality reduction and the lower the association between parental background and children earnings, signalling that the degree of progressivity among children may be an effective weapon to reduce intergenerational inequality.