By Silvia Marchetti
ROME (MaceNews) – Italy’s government is expected to clear after the summer break a series of tax cuts to support low earners and struggling firms but needs time to find resources, according to ruling coalition sources.
“This is a key fiscal reform which we were hoping to approve before parliament shuts this month, however, we’re forced to buy time in order to identify where to draw the needed resources to fund the tax cuts”, said an official.
So far only EUR 3.5 billion have been earmarked for the fiscal overhaul, which is expected to have a total cost of EUR 40 billion. Sources noted how the tax reform, aimed at simplifying the system and making it more ‘progressive’ based on income levels, had been requested by the European Commission as a condition to use pandemic aid.
“Our government has committed to a series of reforms in order to upgrade the country and make it more efficient, which are paramount to making sure that the EU’s pandemic funds will be properly and speedily used. Without reforms such as the fiscal one, pandemic aid alone will not be enough in kickstarti the post-COVID recovery”, said another official.
Two key pillars of the upcoming fiscal overhaul are expected to be the abolition of a regional tax called IRAP which weighs on small businesses, and tax cuts for low earners and struggling families with kids through a re-modulation of income tax rates.
Business lobbies have repeatedly called to scrap the IRAP levy, seen as an obstacle to investments in tough COVID times.
Another key move will likely be to reduce the existing five tax rates down to 3three or four, and to cut taxes for workers earning yearly between EUR 28.000 and EUR 55.000. Alternatively, according to sources, the government could push to introduce the so-called German tax model which is more progressive, starting at 1% and rising incrementally to 42% – 45% for very high incomes. There would be extra tax cuts for young workers, too.
The reform would not initially involve any changes to VAT, which could be decided at a later stage.
Sources noted that additional resources needed to fund the tax cuts would come from a crackdown on tax dodgers and a thorough tax expenditure review aimed at cutting down on the “crazy jungle” of tax bonuses, tax credits, tax exemptions and tax deductions (for instance for health spending) currently envisaged by Italian law (both at national and local level), maintaining just those that support families and workers in need.
According to a report by the Italian parliament there are currently 500 different kinds of tax expenditures in Italy depriving public coffers of roughly E61 billion each year. Sources argued that reducing these and simplifying the whole system is a tough task which will require some time, and can only be done one step at a time. The European institutions have repeatedly urged Rome to reduce the amount of exemptions and preferential fiscal treatments.
It is likely the tax reform will also modify the so-called “flat tax” of 15% for VAT low earners with yearly income of up to EUR 65.000, introduced by the League in the previous government. The flat tax will either be totally scrapped or slightly raised. The League has always made the flat tax a cornerstone of its agenda but is aware there is no room for it within the wide ruling coalition that supports premier Mario Draghi.
“We would like to keep it, however, some sort of compromise will eventually be reached with our ruling allies. We have already been assured that there will be a transition period between the current system to the new one, so to avoid that struggling VAT holders find themselves with higher taxes overnight”, said a League source.
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Contact this reporter: silvia@macenews.com
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