• capital income distribution
• financial returns on personal wealth
• income inequality
• income taxation policy
• wealth inequality

The distribution of rates of return on personal wealth and how they contribute in shaping capital income inequality is an issue of recent investigation in the economic literature. This work constitutes an attempt to conservatively estimate rates of return on wealth within the households sector, to be used to update the current evidence over the distribution of capital income in Italy. Pivoting on the capital stocks capitalization data provided by Jordà et al. (2019), we infer that the relation between wealth and returns on wealth in Italy is monotone increasing and convex: if one excludes periods of extremely severe downturns in financial markets, the richest groups in the Italian population earn capital income returns that range from slightly to significantly greater than those earned by poorer groups. While interest rates on net wealth are predominantly negative within the bottom two deciles in the Italian economy, due to debt exposure within the poorest groups, divergence in returns is also due to the fact that financial portfolios at the bottom ensure lower yields on financial wealth, signaling worse investment opportunities. Returns at the top of the distribution are always more volatile, though their expected performance is consistently higher. Using our estimates, we revise the distribution of capital income in Italy to increase the Gini index from 0.78 to 0.80 on average. The share of capital income accruing to households in the top 1% in 2015 is thus estimated to be between 8% and 12% greater than before, while the share of lower wealth groups undergo a reduction that ranges between -3% and -14%. We also show that the substantial increase in the inequality in business and equity income explains a great deal of those changes. Finally, we draw income tax policy implications using optimal tax formulas in Saez and Stanthceva (2018) and show that, if the tax legislator considers returns heterogeneity in its redistributive concerns, one should advocate a progressive income tax schedule in a dual income taxation system. Nonetheless, an omnicomprehensive income tax schedule seems to reach better redistributive outcomes across the income distribution.