Saturday, November 11, 2006

the italian budget bill: a progressive "Counter-Reformation?"

The Italian budget bill was recently passed by the Chamber of Deputies and, although it is likely to undergo further changes before final adoption, looks set in its essential outlines. The bill may or may not be good news for Italians, but it is bad news for those who believe progressive taxation is in a terminal decline, or that vertical equity issues have lost their punch in Western societies. One of the first acts of Italy's center-left government, the bill--if remaining largely moderate in nature--moves unmistakably in the direction of redistribution and away from the tax-cutting philosophy that characterized the preceding Berlusconi regime.

Like the existing system, the new individual income tax (IRPEF) will have five rates topping out at 43 percent. The difference is that the 43 percent rate will apply to incomes in excess of 75,000 as opposed to the previous 100,000 euros and--important psychologically if not practically--will be made a permanent as opposed to temporary feature of the tax code. The bill further assumes a "back to the future" posture by reinstating credits (detrazioni) in place of the simpler, but less vertically equitable, system of deductions introduced in the last reform. Together with changes in the tax treatment of families and other new provisions, the bill is anticipated to reduce taxes on families having below 40,000 euros of income and increase them, if less than spectacularly, on the highest brackets. A reinvigorated war against tax evasion, which is something of a national sport in Italy, completes the package.

Together with its fiscal implications, the budget bill is an interesting study in what might be called the culture of taxation in different countries. In some countries tax policy is left largely to the experts, the politicians intervening only to set very broad directions. By contrast the Italian tax reform has been front-page news for a month or more, with Berlusconi threatening to lead street demonstrations and a serious threat that the Prodi Government would collapse over the issue. Whether this is really about taxes or simply the continuation of a hard-fought, effectively tied election is difficult to say. One thing is certain: the Italian case demonstrates that tax rates which go down can also go back up, and progressivity, real or imagined, retains its potency as a tax policy mantra.


At 10:36 PM, Anonymous Anonymous said...

Unfortunately this is one of the plethora of reasons why Italy (the world's sixth largest economy is in a disataarous decline). For all the flaws of the former PM he was at least in the business of cutting taxes.

Italy must just hope that one day a reicarnation of Margaret Thatcher becomes the leader if this country is to reach it's potential.


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