taxation and fiscal policy: the counterattack continues (or does it?)

Taxation and fiscal policy have lately been in the news in all of the countries that I follow, although it is as always not easy to discern a simple pattern. In Italy the new Government of Premier Romano Prodi is already talking about tax increases, including increased taxes on financial income, estate ("successions") tax reform, and a more assertive war on tax evasion, although the latter has been promised by Italian rulers since about the time of the Caesars. The Government's rhetoric is driven in part by left-wing ideology, but more immediately by the need to get the Italian deficit below 3 percent of GNP as required by international agreeements. The finance minister, Tommaso Padoa-Schioppa, recently added a new twist by suggesting that regions which exceeded their health expenditure targets might see both their income and IRAP (an unpopular regional tax) rates increased to make up the difference--a combined budget balancer and warning to other regions to control spending at the same time. Italy's political atmosphere has remained tense, with the far left speaker of the house, Fausto Bertinotti, wearing a peace ribbon to the Republic Day military raid while the recently defeated Prime Minister, Silvio Berlusconi, led a group of sympathizers through Rome singing a tune whose chorus asserted that "anyone who doesn't dance is a communist."

Liberal reaction--if there is indeed such a term-- is also the order of the day in Israel, where there is talk of shifting a substantial sum from defense to social spending, a shift made either easier or more difficult (depending whom you ask) by the selection of the Labor party leader, Amir Peretz, as Defense Minister. Peretz's choice of Defense over a "social portfolio" is one of several recent cases in which advocates for the poor, upon attaining power, choose high profile foreign policy positions rather than those directly relating to social policy, which may either be a case of hypocrisy or simply common sense. The Israeli cabinet also allocated 300 million shekels to increased health coverage, and there is talk of restoring some reductions in allowances for large families as well as reversing, or at least slowing down, the recent tax cut momentum.

India, as previously reported, has also been considering various tax reform measures although with the exception of a proposal to increase capital gain taxes--made by the communist party and so far receiving little support elsewhere--most of these have been of an incremental nature. The capital gain proposal was in part a response to increased volatility on the Bombay Stock Exchange which many blame on foreign investors and which, at any rate, captures the sense of inequality/vulnerability that many Indians feel in the face of rapid economic change. The Government also attracted attention by introducing a new tax form four times longer than the previous one, leading people to joke that the saral (simple) form, well, wasn't any more.

If there is a common thread to the news items above, it would appear to be a continuing ambivalence toward--and perhaps a nascent reaction against--the "low-tax, low-wage" model of development sometimes posited as an inevitable concomitant of globalization. Yet this ambivalence/reaction continues to take different forms in different countries, and the underlying pressure toward lower, flatter rates is not necessarily changed by it. The issue of common themes, and some recent academic commentary, will be considered in a future post.