Italy faces fiscal drag risks for workers and pensioners

The phenomenon of fiscal drag, often referred to as an ‘invisible tax,’ is expected to impact Italian workers and pensioners significantly during the 2026-2027 period. This occurs when inflation drives up nominal wages and pensions to maintain purchasing power, but because Irpef tax brackets and deductions are not automatically indexed to inflation, taxpayers are pushed into higher tax brackets.

Economists Marco Leonardi and Leonzio Rizzo estimate that this mechanism could result in an additional tax collection of between 8.1 and 12.74 billion euros, depending on inflation levels. In a central scenario, approximately 6 billion euros would fall on employees and 2 billion on pensioners.

While recent government reforms and tax adjustments between 2021 and 2026 have partially offset these effects—with Istat reporting that reforms exceeded fiscal drag by 4.5%—the risk remains high for middle-to-high income earners and retirees. Bank of Italy data shows that fiscal drag generated nearly 18 billion euros for the state between 2022 and 2025.