The Social Contribution (SC) module. Development and results of the IRAP-SC Italian model

A brief overview of the labour cost differences in EU is introduced, stressing on the heavy fiscal burden on Italian wages and salaries. Then, the basic principle of Social Security financing system in Italy is analysed and details on labour cost fiscal legislation and on specific tax rates are provided. In the fourth section the structure of the Social Security Contribution module is explained. The final section is devoted to the validation of the two modules, with a comparison between model estimation results and Official Revenue Data (Tax Authority and INPS). As an overall conclusion about our work at this stage, we may assert that the performance of the model in reproducing the working mechanism of these two indirect taxes –IRAP and Social Contributions – is very good. In fact, the average deviation from the official data by sector of activity, legal status of the firm and firm size is very low: the model underestimates Irap revenue at 1.3 per cent and overestimates the total contribution revenue at 4,2%. Considering the complexity of tax rules and the modelling ssumptions due to data unavailability, we reckon that this is a good starting point for forecasting policy changes although there is some room for improvement whereas official fiscal microdata – from Tax Authority and INPS – should become available.