Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
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Taxation in Italy compared to other European tax systems

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Taxation in Europe - Yearbook 2013

Italy

There seems to be no respite to Italy economic and political torments. The year 2012 witnessed a deepening of the downturn of the economy. The Italian GDP declined by a huge 2.4%, brought mainly by a deep fall in the domestic demand. Increased taxes dented heavily household’s incomes, while gloomy domestic and international perspectives induced firms to postpone investment plans and families to increase precautionary saving. Public expenditure was not really cut but mainly postponed, particularly with reference to payments due by all levels of government to their providing firms, particularly in the health and construction sectors. Only exports had an appreciable resumption, showing the resilience of the Italian industrial sector.

The economy, the budget and the political system

The fall of GDP slimmed dramatically the gains on the general government balances that the exceptionally large adjustment measures taken in 2011 through tax increases and expenditure cuts and postponements would otherwise had made obtainable. The combined effect of adjustment policies brought, in 2012, the primary balance of general public sector to 2.4%, against a previous year 1.2%. The level reached, 2.4%, is a level that in an ordinary situation would be considered as a pretty healthy one. Unfortunately, but in Italy misfortune is produced largely domestically, the expenditure for interest on public debt is very high, absorbing a share of 5.4% of GDP. This is because of the size of the public debt. During 2012 interest expenditure was also swollen by the increased spread between the Italian interest rates on bonds and the benchmark (the German rates on 10 years maturity bonds).

The difference between the expenditure for interests and the primary balance determines almost completely the deficit of general government: 3.1%.[1] While this deficit is in line with the engagements taken by Italy with the EU institutions, its expanding impact on the stock of the public sector debt continues to operate. More precisely, the combined impact of the budget deficit and of the fall of GDP brought was an increase by almost 6 percentage points of the share of public debt on GDP.

The deepening of the economic depression concomitant with the tax increases dented the popularity of the government led by Mr. Monti that lost most of its parliamentary support. A widespread anti-tax attitude was also fostered by the bolder behavior of the tax administration agency (Agenzia delle Entrate) that strengthened control of evasion and made expanded, if not excessive, use of penalties for formal errors and delays of payments. Also the (usual) harsh methods used during controls by the tax police contributed to increase popular resentment.

Mr. Berlusconi, whose government had presided to the dramatic worsening of the Italian public finances, distanced totally from the Monti government and took a rather populist, anti-tax stand against what were labeled as Europe unduly imposed austerity measures.
Most other parties followed, starting a competition of tax reductions promises. The national elections of February 2013 brought a deep split of votes between the traditional parties considered to be responsible of the economic woes and newly emerging political anti-establishment movements.

Tax policies

Changes have been very limited during 2012. The absence of measures did not impede a rapid increase of tax collections that brought tax pressure to the unprecedented level of 44% of GDP, following the full implementation of the measures taken during 2011. One has to signal in this regard the re-introduction, during 2012, of the local property tax (IMU) on primary residences; the submission to taxation of real property owned abroad; the introduction of a registration tax on financial assets held at banks, which works, although partially, as a tax on financial wealth; and finally the renewed levy[2] on financial assets repatriated in the past years.

The dynamics of direct taxes, determined mainly the above mentioned taxes on wealth, was matched by a similar dynamics of the collections from VAT and excises on fuels.

The government tried to re-take control of tax policy in December by bringing to Parliament a partial reform of the personal income tax through the lowering of the tax rates applied to the lowest income brackets combined with an increase from 10 to 11% of the VAT tax rate applying to food, fuels, transportation and culture. However, the proposal was defeated by the Parliament, whose main worry was to avoid further tax measures on the eve of national elections.

The main tax measure that was approved has been the introduction, since March 2013, of modest version of Tobin Tax applying initially to all transactions made by residents of stocks of major companies (with a stock capitalization of more than 500 millions) with a modest tax rate of 0.12%.

The government was more successful with a new legislation enshrining the balanced-budget principle in the constitution, although its implementation will be quite likely as shown by other countries experiences.

Short-term perspectives

Do not look clearly bright. If growth does not resume quickly- something that looks rather unlikely, unfortunately – the Italian government will have to implement harsh measures to keep deficit under control. In fact Italy, more precisely the Monti government, took commitment to increase VAT from 21 to 23% in 2013, in case expenditure cuts of a corresponding amount cannot be implemented. However, the space for further tax increases is very narrow, if not non-existent, due to the high tax/GDP ratio. Taxation of labor is high and distortionary and should be reduced if Italy intends to increase the competitiveness of its economy. Some rebalancing of taxation from incomes to consumption would be desirable, but it should place through reduction of evasion rather than increases in tax rate.

Main fiscal and economic indicators

20082009201020112012
Public debt (% of GDP) 105.7 116.0 118.6 120.1 127.0
Public deficit (% GDP) 2.7 5.3 3.9 3.9 3.1
Public expenditure (% of GDP) 49.4 52.5 51.2 50.5 51.2
Interest payments (% of GDP) 4.6 4.7 4.6 5.0 5.5
GDP Growth -1.0% - 4.8% +1.8% +0.4% -2.4
Primary balance (% of GDP) 2.5 -0.8 0.1 1.2 2.4
Tax pressure: taxes and social contributions on GDP 42.8 43.3 42.3 42.2 44.0

Increased taxation would depress further the economy. Moreover, it seems quite unlikely that political parties will accept new increases after promises to reduce taxation they are presently dispensing.

A few, debatable, lessons from recent events

First, come the limits of the so-called technical governments, such as the government led by Mr. Monti, in pursuing effective long term reform policies. More specifically, disregard of popular consensus - in other words, the use of democracy deficit to impose harsh measures – may turn presumed long-term gains into only short-term gains. Clearly, the distribution impact of the adjustment programs, particularly on the poorest segments of the population, was disregarded by the Monti government. Some support to these segments, attenuating the burden of tax increases on them, would possibly have increased the popular acceptance of the measures.

There was also underestimation by the government of the capacity taxpayers have to bear taxes. This was utmost clear in the case of the local property tax. Tax rates were quite high and applied to obsolete and quite erratic evaluations of properties. Practically no exemptions on property owned by poor individuals were given. This strategy (if there was one), the high visibility of the property tax and the fact that an overwhelming proportion of Italians, including the less wealthy, are owners of the apartment they reside lead to the formation of anti property tax front quickly exploited by Mr. Berlusconi’s party.

The support from European and other supra-natural institutions cannot obviate the need that all governments have to try to gather domestic consensus even in difficult times. This is more evident with tax policies.

Characteristics of the tax system

20082009201020112012
Corporate income tax (rates) 27.5% 27.5% 27.5% 27.5%
31,5%
for energy sector
27.5%
31,5%
for energy sector
Corporate income tax revenues as share of total fiscal revenues 11.5% 9.4% 8.3% 8.0% 7.8%
VAT (rates) 4,10,20% 4,10,20% 4,10,20% 4,10,21% 4,10,21%
VAT revenues as share of total fiscal revenues 28.4% 27.1% 26.0% 26.2% 26.3%
Wealth tax (rates) None
Death tax (rates) 4% for transfers between parents and children exceeding 1 million euro s(unchanged throughout those years)
Death tax revenues as share of total fiscal revenues n.a. n.a. 0.1% 0.1% 0.1%
Property revenues as share of total fiscal revenues 2.1% 2.2%
Social contributions (% of GDP) 13.7 14.1 13.7 13.7 13.8
Share of central government
(in terms of expenditures compared to total public spending)
57.3% 58.4% 58.5% 58.5% 58,4%
Share of local administration
(in terms of expenditures compared to total public spending)
31.1% 31.3% 31.2% 31.2% 31.4%

Giorgio Brosio
University of Torino

This is part of :

Taxation in Europe - Yearbook 2013
The yearly report on the evolution of European tax systems

A short presentation of IREF ’Yearbook on Taxation in Europe’ Series
Among the many ways to understand the climate of opinion and the culture of a country, looking at its fiscal system is one of the most rewarding. Sure, fiscal systems almost always rhyme with complexity; each system bearing the (...)


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