What will Draghi’s tax agenda be? Lavoce.info analysis
Points, ideas and insights on tax issues that will be at the center of the Draghi government. The analysis by Massimo Bordignon, professor of Finance, taken from Lavoce.info
One of the major difficulties to be faced for the future Draghi government will undoubtedly be the tax reform. After the sudden conversion of Matteo Salvini on his way to Brussels, the extra-large parliamentary majority that – apparently – will support the new government has in fact completely antithetical ideas on the tax front. It oscillates between those who would like the introduction of a personal tax on assets and a strong tightening of the progressivity of the income tax to those who, on the contrary, still support the flat tax and the net cut of the tax burden, with all due respect to the sustainability of the accounts public. It would really be a big problem if the vetoes in Parliament blocked the reform. In fact, if in Italy there is a fundamental infrastructure that requires urgent interventions, it is the taxman. Twenty years of successive and uncoordinated interventions on the tax system by governments with opposing world views have generated a sort of legal and economic opprobrium.
The resigning government – Count 2 – had already expressed its intention to intervene, in particular on the IRPEF, allocating some resources (8 and 7 billion to be precise in the years 2022 and from 2023 onwards) to support the tax reform. But since the vast majority of these resources (between 5 and 6 billion) is actually destined to finance the new single allowance for children, now in an advanced stage of approval, it has never been understood exactly to what extent Count 2 really had the intention of intervening on the tax authorities. The disproportion between the declared objectives and the limited resources allocated rather presaged some marginal intervention on personal income tax rates and brackets.
REFORM OF THE TAX SYSTEM OR OF THE IRPEF ONLY?
The new Draghi government will have to start from here to choose what to do. The first question will be to decide whether to limit oneself to some intervention on the income tax or to attempt a more general reform. The problem with the first option is that the resources already available are few and those that could derive from marginal restructuring of the tax are also limited.
A more general revision of the tax system would allow raising more resources while addressing some of its more structural problems at the same time. The main one is that the Italian tax authorities are mainly based on the taxation of income from work; and actually due to the strong evasion of income from self-employment (evaded at 68 per cent, according to official estimates), especially on the taxation of income from employment (and similar), which in fact alone constitute 84 per cent of the base taxable income tax. In terms of effective tax rate, Italy ranks third in Europe for labor taxation, while it ranks twenty-fifth for consumption taxation. This has negative effects on growth and employment and is also worrying in perspective, given the trend, common to all developed economies, of a reduction in the share of compensation of employees in total income.
In fact, the recommendations of the European Commission to the country, which the Draghi government will certainly take into account, are for a decisive shift of the tax burden from labor to consumption. This could be done not only by acting more decisively on VAT evasion, but also by reviewing and merging the rates (especially by intervening on the intermediate one). Several studies show that an operation of this type, in addition to heavily reducing the tax burden on labor, could be carried out without significant regressive effects on taxpayers. Moreover, given the period of economic crisis and the suspension of the Stability Pact, it would perhaps also be possible to consider forms of intertemporal exchange: a reduction in taxation in the IRPEF today, accompanied by a credible increase in the taxation of consumption in the future, once the crisis triggered by Covid was overcome.
THE REFORM OF IRPEF: TAXABLE BASE
The second issue concerns the structure of the personal income tax, starting with the tax base. The tax is not only heavily evaded, but also very eroded, due to the decision – taken by several governments – to gradually subtract income from progressive taxation in the Irpef and subject them to proportional substitute taxation, moreover with all different rates. Added to this is a vast array of tax breaks, deductions and tax deductions, which are constantly rising and often to the benefit of very particular interests: at the last count, it is 171 tax expenses recognized on the income tax. According to official estimates, all these concessions reduce personal income tax revenue by at least 40 billion euros per year. Obviously, if the vast erosion area could be limited, revenue could be recovered to invest in a reduction in rates.
The problem is very complex. For fiscal expenses, it must be taken into account that for some of these, among other things those that cost more in terms of revenue (such as building renovations), it is not possible to recover much in the short term, given that the commitment made by the taxation towards taxpayers extends over several years. For other forms of erosion, the problem is more of a political nature, given the strong role played by past governments in introducing them. The types that most deserve to be reviewed concern the taxation of properties and the so-called flat tax on income from self-employment and sole proprietorship (the expansion of the flat-rate up to 65 thousand euros in turnover) decided by the yellow-green government.
On the taxation of real estate, the fundamental issues concern the maintenance of the flat rate tax on rents, the revision of the land registry, the decision whether or not to reintroduce a form of taxation on residences, taking into account that Italy is the only country in the group. of those developed to fully exempt the first home (except the luxury one) from any form of taxation, in terms of income or assets.
On the flat tax of the self-employed, the theme is that the flat rate thus expanded (covers about 60 per cent of taxpayers belonging to these categories) introduces strong violations in horizontal equity (the saving in terms of taxes to be paid at the Irpef compared to a employee is about 5,000 euros to 40,000 euros of declared income, not to mention that these taxpayers are also exempt from VAT and IRAP) and it is also highly distorting, pushing taxpayers to stay below the turnover threshold to enjoy the system of facilitation.
THE REFORM OF IRPEF: STRUCTURE OF RATES AND PROGRESSIVITY
Then there is the problem of progressivity. Irpef is undoubtedly a very progressive tax and has become increasingly so over the last few decades. Today, 75 per cent of taxpayers are placed under the second bracket (28 thousand euros), but they contribute only 30 per cent of the tax revenue, more or less as much as those who are placed above the last bracket pay (75 thousand euro) which, however, are only 2.5 per cent of total taxpayers. Such a progressive structure, on a tax base as small as the current one (mainly income from employment and retirement) would already deserve some reflection in itself.
But a further problem is that the increase in taxation as the tax base increases is obtained as a result of a scale of very low marginal rates (only five, with an 11-point jump between the second and third brackets, from 27 to 38 percent), decreasing deductions (by type of work and family charges) with different inclinations and not always coinciding with the brackets and personal income tax, a subsidy in favor of the income of employees decreasing in taxable income, now increased (from 80 to 100 euros) and increased (from 2021) up to 40 thousand euros. The effect is a series of "jumps" in the effective marginal rates, especially in the low and medium range of employees, where the beneficiaries of the personal income tax are concentrated. For example, it is calculated that the effective marginal personal income tax rate for employees between 35,000 and 40,000 euros, where a large share of these taxpayers is located, is higher than 60 percent, with obvious distorting effects on the supply of work.
It is clear that this taxation structure needs to be revised, at least to eliminate marginal rate jumps. The solutions can be different (brackets with decreasing deductions, brackets with fixed deductions, continuous “German” system, for example), also depending on the level of transparency that you want to give to the tax. But it seems quite clear that in order to bring the system back to rationality, it would be necessary first of all to eliminate the personal income tax bonus, an object unrelated to the tax plan, recovering it in the form of a revision of the rates and an increase in the deduction for dependent employment. However, such an action can be costly on a political level, because it is difficult to build a system that can offer the same benefits to medium-low income as the bonus, unless it is possible to recover sufficient additional resources (by expanding the tax base or by increasing revenue from other taxes) to allow for a strong reduction in the tax burden on these taxpayers.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/governo-draghi-fisco-irpef/ on Sun, 14 Feb 2021 07:00:40 +0000.