The salary increases, but we do not necessarily become richer. Indeed, part of that increase risks going directly back to the tax authorities. It is the paradox of fiscal drag, the so-called fiscal drainage, which with the return of inflation could once again weigh heavily on the pockets of employees and pensioners.
According to the simulations of economists Marco Leonardi, full professor of Economics at the State University of Milan, and Leonzio Rizzo, full professor of Economics at the University of Ferrara, who have long studied the effects of inflation on the Italian tax system, in the two-year period 2026-2027 the increased levy linked to this mechanism could fluctuate between 8.1 and 12.74 billion euros, depending on how much prices grow. In the central scenario, around 6 billion would fall on employees and 2 billion on pensioners.
It is not a new tax approved by Parliament and does not appear as a separate item on the pay slip. Precisely for this reason it is often defined as an “invisible tax”.
What is fiscal drag and why does it make us pay more taxes
The mechanism starts from inflation, when prices rise, salaries and pensions can be increased to try to recover at least part of the lost purchasing power. The problem is that income tax brackets and many deductions are not automatically adjusted for inflation.
The result is that income grows in nominal terms – that is, on paper – even if the taxpayer has not actually become richer, and some of that increase may end up subject to higher taxation.
In other words, we could receive an increase that simply serves to offset the increased cost of spending, energy or services and still find ourselves paying more personal income tax.
Fiscal drag can act not only through the transition from one bracket to another, but also through the progressive reduction of deductions expected as income increases. This is why its effect varies from taxpayer to taxpayer.
How much it could cost us between 2026 and 2027
Leonardi and Rizzo’s simulations take into consideration different inflation scenarios, with a cumulative increase in prices of around 5.2%, the fiscal drain would produce around 8.1 billion euros of increased withdrawals in two years, if cumulative inflation reached 6%, the bill would rise to around 9.35 billion.
In the heaviest scenario analyzed by economists, with prices increasing overall by 8.2%, it would instead reach 12.74 billion euros: around 9 billion would be supported by employees and almost 4 billion by pensioners.
Numbers that should be read as simulations and not as a certain forecast: everything will depend on the actual trend of inflation and any fiscal interventions.
The latest projections published in June by the Bank of Italy indicated consumer inflation of around 3.1% for 2026, mainly due to the growth in energy prices, with a return to 2% in the following two years.
The paradox: the increase serves to recover inflation, but part of it ends up at the tax authorities
The problem is better understood with a simple example: let’s imagine a worker who earns 30 thousand euros a year and receives a 5% increase to compensate for prices that have increased by more or less the same percentage.
His nominal income rises to 31,500 euros, but his ability to purchase goods and services may have remained virtually identical. For the tax system, however, that 1,500 euros still represents additional income.
If brackets, deductions and thresholds remain unchanged, a portion of the increase is then absorbed by taxes. In the end, inflation recovery is only partial.
However, those who do not receive any increase do not suffer this specific fiscal effect, but are still faced with a problem that is probably even worse: a fixed salary while prices rise, and therefore a direct loss of purchasing power.
It had already happened with the 2022-2023 inflation
It would not be the first time, according to Leonardi and Rizzo’s calculations, the inflationary wave of 2022 and 2023 would have generated around 25 billion euros of increased withdrawals through fiscal drag.
Part of the effect was subsequently offset by the tax wedge reduction measures introduced in recent years, but the benefits and higher taxes did not necessarily affect the taxpayers themselves. According to Leonardi, in particular, a portion of incomes above 35 thousand euros would have ended up losing ground.
With the subsequent slowdown in inflation, the fiscal drain eased. Now, however, the new acceleration in prices brings the problem back to the center of the discussion.
Why is it called an “invisible tax”
The peculiarity of fiscal drag is precisely this: the State can collect more taxes without formally increasing Irpef rates. No new tax is introduced and no tax increase is announced. It is sufficient for nominal incomes to grow while the thresholds of the tax system remain unchanged.
Revenue increases automatically, which is why talking only about salary increases or possible reductions in rates can be misleading: to understand how much is really left in people’s pockets, we must simultaneously consider inflation, salary growth, deductions and increased tax collection.
And it is here that what seems like a technical question becomes very concrete: an increase in the pay slip can increase the number written on the payslip without increasing, to the same extent, what we can actually buy.
