At first glance it seems like a paradox: the salary increases, the pension is revalued, a higher figure finally appears on the pay slip, yet in the end the perceived improvement is much smaller than expected. In some cases, once considering how much prices have increased, the taxpayer may even find that he has become poorer in real terms despite earning more euros than before.
This is where the fiscal dragthe fiscal drain that is often called a “invisible tax” because it does not require the introduction of a new tax or a formal increase in rates. All it takes is for nominal incomes to grow while an important part of the tax system remains stagnant.
The phenomenon is now back at the center of attention thanks to the new simulations by economists Marco Leonardi and Leonzio Rizzo. In the two-year period 2026-2027, according to their calculations updated to the Bank of Italy’s forecasts, fiscal drag could produce 8.1 billion euros of increased withdrawal in the central scenariorise to 9.35 billion with higher inflation and go up to 12.74 billion in the most severe scenario.
In the latter case, around 9 billion would fall on employees and almost 4 billion on pensioners. It should be noted that these are simulations linked to different inflation scenarios and not a bill already written for Italian taxpayers.
Because a pay rise may be worth less than it seems
The starting point is inflation. If prices rise, workers and retirees need a higher nominal income just to be able to buy the same things as before.
A 5% increase in salary, in the face of a price increase of close to 5%, therefore does not mean that we have actually become richer: it means, at best, trying to maintain the same purchasing power.
The problem arises when the adjustment of income to inflation meets a progressive Irpef system in which brackets, thresholds and various deduction mechanisms are not automatically revalued at the same rate as prices.
The tax authorities see a higher nominal income and can therefore ask for a higher tax, even if that increase in income does not represent a real enrichment but only an attempt to recover what inflation has already eroded.
This is why fiscal drag is so invisible. No one receives a notice announcing a new tax. No rate is necessarily raised. It is the relationship between inflation, nominal income growth and the tax structure that produces the largest tax levy.
And it is not even necessary, as is often thought, to “jump” entirely into a higher income tax bracket. In the progressive system the higher rate applies only to the part of income that exceeds the relevant threshold, but the drain can also manifest itself through the reduction of income-related deductions and increase in the average effective tax rate.
The 8.1 billion in the central scenario
What makes the problem relevant again are the price outlook. In the projections used for the simulations, inflation remains high enough to continue to push nominal incomes higher.
In the central scenario, fiscal drag would produce a greater withdrawal of approximately 8.1 billion eurosof which around 6 billion are paid by employees and just over 2 billion by pensioners.
If cumulative inflation were to rise further, the bill would increase. With price growth of around 6% over the two-year period, the fiscal drain would reach approximately 9.35 billion.
The number that makes the most impression, however, is 12.74 billion euros. It is the figure of the heaviest scenario, the one constructed assuming a cumulative increase in prices of 8.2%.
It doesn’t mean that almost 13 billion in increased withdrawals are inevitable. It means that, if inflation were to push towards that level, this would be the potential size of the fiscal drain estimated by economists.
And it is precisely this distinction that is fundamental. Fiscal drag grows together with inflation: the more prices rise, the more wages and pensions must nominally increase to catch up; the more nominal incomes grow without the tax system being adjusted, the greater the share absorbed by Irpef may become.
The real problem is purchasing power
For those receiving the salary or pension, the question is therefore not just how much tax is paid, but how much is actually left in your pocket after considering both taxes and the increase in the cost of living.
Imagine a worker who gets a raise solely to offset inflation. Before taxes, his real income should, at least theoretically, remain unchanged: he earns more euros, but those euros are used to purchase goods and services that have become more expensive.
However, if a greater tax levy intervenes on the nominal increase, the recovery of inflation is no longer complete. The salary has increased on paper, while the actual spending capacity may continue to decrease.
This is what makes the phenomenon particularly delicate for income from employment and pensions, i.e. the components on which the vast majority of the IRPEF revenue analyzed by the simulations is concentrated.
The calculations also mainly take into consideration the Irpef and do not necessarily reflect the full effect of the regional and municipal surtaxes, which can further modify the effective tax burden on income.
It’s not the first time: the precedent of 2022-2023 inflation
The problem does not arise in 2026. During the great inflationary wave of 2022-2023, fiscal drag had already produced a significant increase in the tax on income.
According to the reconstructions of the economists themselves, the fiscal drain linked to that phase would have generated approximately 25 billion euros of increased withdrawal.
In the following years, the slowdown in inflation had reduced the phenomenon, but had not eliminated it. With a new acceleration in prices, the mechanism can quickly return to weighing on taxpayers.
Not all of the increased withdrawals produced by fiscal drag, of course, remain uncompensated. In recent years there have been cuts to the tax wedge, changes to the Irpef, bonuses and deductions designed to support disposable income.
But fiscal drag and tax reduction are two different phenomena, and can occur at the same time.
A government can approve a tax cut and, in the same period, inflation can generate an automatic increase in the tax on some taxpayers or neutralize part of the benefits obtained over time.
This is precisely why looking only at nominal rates is not enough to understand what really happens to the paycheck.
Why is it called an “invisible tax”
The definition can be misleading because fiscal drag it’s not technically a new tax. Rather, it is the effect created when a progressive tax system expressed in nominal values is not fully adjusted for inflation.
And it is invisible precisely because it does not arrive through a new entry on the payslip. It manifests itself little by little: a contractual increase that yields less than expected, a revaluation of the pension that does not completely recover the cost of living, a deduction that is reduced because the nominal income has increased.
For the State the effect is the opposite: revenue can increase even without approving an explicit increase in rates.
The 8.1 billion in the central scenario oh 12.74 billion of the most severe one they are not automatically equivalent to a new tax approved by the government, but represent the largest levy that can arise from the simple encounter between inflation and the tax system.
And it is precisely here that the problem for millions of Italians lies. Salary can go up. The pension can be revalued. More euros can enter the current account than before.
But the question that really matters is another: How many of those euros represent a real increase and how many only serve to pay higher prices and taxes?
It is in the difference between what increases on paper and what actually remains in the wallet that fiscal drag works. And if the worst scenario were to materialize, that “invisible tax” could almost be worth it 13 billion euros in just two years.
What is fiscal drag?
Fiscal drag is the increase in tax collection caused by nominal growth in salaries and pensions due to inflation. Even without an increase in rates, taxpayers may find themselves paying more personal income tax.
Why is fiscal drag called an “invisible tax”?
It is called an “invisible tax” because it is not a new tax introduced by the government. The increased levy arises automatically when nominal incomes, Irpef brackets and deductions are not adjusted in the same way for inflation.
How much might fiscal drag cost in 2026 and 2027?
According to the estimates considered for the two-year period 2026-2027, the fiscal drag could be worth around 8.1 billion euros in the central scenario and reach up to 12.74 billion in the highest inflation scenario.
Does fiscal drag also affect pensions?
Yes. The fiscal drain can affect both employees and pensioners, because the nominal increases in pensions linked to inflation can also lead to an increase in the Irpef levy.
Why might a salary increase be worth less?
If the salary increases to compensate for inflation, the worker does not necessarily become richer in real terms. If the tax burden also increases at the same time, part of the increase is absorbed by taxes and the recovery of purchasing power is reduced.
To have fiscal drag do I have to move to a higher Irpef bracket?
No. Fiscal drag can occur even without a real “jump” in bracket, due to the progressive nature of the Irpef, the reduction of some deductions and the increase in the average effective rate.
How can fiscal drag be avoided?
One possible tool is to periodically adjust tax brackets, thresholds and deductions to inflation. Alternatively, the increased levy can be compensated through interventions on the Irpef or other fiscal measures.
