High Inflation and Wage Rigidity: The Implicit Response of the Italian Tax-Benefit System

We study income redistribution in Italy in a context in which benefits are indexed to high inflation, wages struggle to keep pace, and most tax parameters are not indexed. We isolate the contribution of indexation-induced changes in taxes and benefits to the government budget and inequality reduction. Our findings reveal three key effects: i ) generating resources equivalent to 0.75% of GDP in 2023; ii )distributing these resources disproportionately, favoring retirees who experience a 2.2 percentage-point larger increase in disposable income than private sector employees; and iii ) reducing overall inequality while reinforcing the redistributive capacity of the government.