The fiscal drag is 25 billion (not 12) and it was paid by middle-high income earners
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the data
When inflation runs high and tax thresholds don't move, tax revenues "secretly" increase with rising prices. In Italy, the failure to comply will cost approximately €25 billion between 2019 and 2023, and those with incomes above €35,000 are the only ones who have paid the price without significant compensation.
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Fiscal drag isn't an Italian anomaly : it's common in all countries with a progressive tax system during inflation. When prices rise but tax thresholds remain unchanged, taxpayers find themselves paying more taxes even though their purchasing power hasn't increased. It's a silent drain, shifting income from taxpayers to the government.
An OECD survey (Taxing Wages 2023) of 38 developed countries shows that 18 countries automatically index taxes and social transfers to inflation. Italy is one of 20 countries that does not automatically adjust either personal income tax or social benefits. But while most of these 20 countries decided to adjust the thresholds anyway given high inflation, Italy remains the only one to index almost nothing, along with Spain, Malta, and Cyprus. Almost all countries that automatically adjust use the consumer price index or derived indices, 16 countries including the United States , Canada, Mexico, Belgium, France, Norway, Austria, and others. Only a tiny minority (two to be precise: Denmark and Lithuania) use wage trends, and they do so to contain public spending, not because it is "fair." The correct reference remains general inflation, because fiscal drag precisely measures the "extra" taxes that citizens pay as a result of rising prices, not wages . If Italy were to ever decide to index its personal income tax, it would have to do as the 16 countries that index to prices have done: we would strongly advise against using the wage growth rate for the obvious reason that wages grow much less than prices. If one wanted to "save money," one could index personal income tax to prices only occasionally or only above a certain inflation threshold.
To illustrate the difference between indexing to prices rather than wages, a historical example is sufficient. Pensions are revalued using the price index. During the 1992 crisis, there was a discussion about tying pension indexation to wages in order to save money. It was argued that it was unfair to treat workers and pensioners differently, but it was well known that the purchasing power of pensions is maintained by indexing them to prices, not wages. That discussion came to nothing: pensions continued to be revalued relative to prices (if anything, today the Meloni government is saving money by cutting the revaluation below the threshold of €2,100 gross per month). To put it simply: a recent paper by the European Central Bank estimated fiscal drag in European countries . Using the same years—from 2019 to 2023—and the price deflator, the result for Italy is approximately €25 billion in additional personal income tax due to fiscal drag alone. If wage growth is used as a deflator, the value would be much lower: 12 billion.
But, as we've said, the correct deflator is the price deflator. And €25 billion is a conservative estimate because low-income earners have often lost access to welfare benefits tied to ISEE thresholds, and high-income earners have paid higher tax drags through local and municipal IRPEF surtaxes. Both of these factors are not taken into account here. Given that it's approximately €25 billion, the question is whether the tax drag has been fully returned to citizens through tax reductions. Taking into account all the tax cuts implemented by the Draghi and Meloni governments, the figure comes to €25 billion , but so far, excluding this budget law, all tax cuts have primarily affected low-income earners under €35,000 per year, while little or nothing has gone to higher-income earners. They've simply paid the tax drag without receiving significant compensation. In this budget law, the government claims to have reduced taxes on the middle class. But in reality, this isn't a matter of restitution. The approximately 3 billion per year in reductions in personal income tax for the middle class represent a partial reimbursement of what the fiscal drag had taken away.
Finally, there is a serious discussion to be had, namely that many might consider it normal or even “right” for the government to collect the fiscal drag and then use that revenue at its discretion to reduce the public debt , increase spending, or reduce taxes for whoever it prefers.
After all, 20 out of 38 countries, like Italy, do not automatically index their personal income tax. However, it's important to note that fiscal drag is absent or limited when inflation is low, as it has been over the last 30 years. However, when inflation rises, it produces a mechanical increase in personal income tax and significant revenue. The OECD calls this "tax by stealth": a hidden tax. And the same thing will happen if inflation were to resurface.
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