By Silvia Marchetti
ROME (MaceNews) – Italy’s government is considering ambitious tax reform aimed at cutting Italy’s high taxes, simplifying its complex mix of exemptions, deductions, and credits, and helping lower earners, according to ruling coalition sources.
Reducing taxation is paramount to kickstart the post-COVID recovery and boost consumption rates, argued sources. Italy’s income taxation level, up to 43%, is among the highest in Europe.
The model is the Danish tax scheme where taxation is “progressive and fair depending upon income levels that are also taken into account in determining adequate tax exemptions,” said an official. Parties in the ruling coalition have yet to agree on a reform plan, or what “progressive” means.
A parliamentary committee is working on proposals to be forwarded to the government in coming weeks, while Prime Minister Mario Draghi could also set up a high-level mixed team with experts and politicians to look into the overhaul further.
Draghi has made comprehensive tax reform a cornerstone of his ruling agenda, alongside justice and public administration reform. The fiscal overhaul will also target general fiscal simplification.
“Party talks are under way but general guidelines are to potentially revisit and simplify Italy’s complex system of tax rates and review the jungle of tax expenditures so to boost fiscal incentives and bonuses only for the low earners,” said another source.
An option being discussed could be to reduce the existing five income brackets down to three or to remodulate tax rates in favor of low and medium income workers.
“We think it’s unfair that between the first tax rate at 23% for yearly income up to E15,000 and the second rate at 27% for income up to E28,000 there’s so much difference. The gap is too wide — it would be appropriate to narrow it down,” said the official.
“On average, most income levels in Italy are tied to the second tax rate, meaning many workers automatically pay 27% in taxes if they happen to earn one year just a few thousand euros more,” the official said.
Sources argued that tax cuts should mostly benefit low earners and respect constitutional rules which require taxation must be progressive. The income tax reform should be comprehensive and avoid one-off changes; it should also be implemented gradually.
To partly fund the cost of tax cuts, of which there are no estimates yet, the government is considering reducing the existing number of fiscal bonuses, deductions and exemptions and limiting these to workers in need.
According to a report by the Italian parliament, adding up state and local taxes, there are about 500 different kinds of tax breaks in Italy depriving public coffers of roughly E61 billion each year. The European Union Council has repeatedly urged the government to reduce its “use and generosity of exemptions and preferential” fiscal treatments.
“It’s quite messy now — the goal is to rationalize the crazy amount of existing fiscal deductions and exemptions, some could be scrapped while others adjusted and made progressive depending upon income level, but it is crucial to compensate potential income tax cuts with a tax expenditure review,” said the official.
Ruling parties will need to reach an agreement over what constitutes ‘tax progressiveness’ in their view. The League, now part of the coalition, in the past supported the idea of a flat tax but has been forced to ditch its plan in order to be part of the coalition.
Draghi’s government also plans to boost efforts to crack down on tax dodging through increased e-invoicing and digital payments easier to track.