Sunday, October 15, 2006

italian budget bill hits snags

The differences between tax policy in Italy and the United States were brought home in the past few weeks when opposition leader Silvio Berlusconi--possibly upset by plans to strip him of a portion of his media monopoly--threatened mass protests in various cities against the proposed budget legislation (see previous blog). The legislation, proposed by the center-left Government, would extend the top tax rate (43 percent) to incomes exceeding 70,000 Euros as well as expanding the Government's ongoing efforts against tax evasion. Statements by other opponents of the bill, to the extend that they had personally evaded taxes and were proud of doing so, suggested the degree of the challenge faced in reforming this area. So far the Government has, generally speaking, held firm.

An article in Corriere Della Sera captured some of the tax compliance problem. According to the article, a survey of selected regions found that jewelers were reporting lower incomes than the average schoolteacher and dentists than the average police officer. The difference would appear to result, not from the high salaries of teachers and policemen, but from the fact that they are paid fixed amounts which are more difficult to hide than the income from a private business. Faced with this background--common to many countries--the income tax tends to seem rather arbitrary in nature, and building a consensus against evasion becomes much more difficult.

A piece of good news for the Government came last week when the IRAP, a sort of regional business tax, was held compatible with EU norms by the European Court of Justice, which has taken an increasingly assertive role in tax matters. The court held that the tax was sufficiently different from a value added tax that its imposition did not violate community norms with respect to VAT tax rates. Alas, Italy has been talking about eliminating the tax.


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