Assonime Recommends Direct To Indirect Switch In Italian Taxes

by Ulrika Lomas, Tax-News.com, Brussels

25 January 2010

Luigi Abete, President of Assonime, a leading association of Italian companies, at a conference in Milan, has said that, in order to stimulate economic growth and investment in Italy, taxes on the corporate sector will need to be reduced.

In a situation, he said, where the Italian public sector deficit is so large that any reduction in the level of overall taxation is impossible without significant cuts in government spending, the option of producing a decrease in direct taxation by increasing indirect taxes becomes more attractive.

He added that the usual objection to an increase in value-added tax (VAT), that it is regressive, is not supported by empirical evidence. In any case, targeted assistance, by way of personal income tax allowances or other measures, for poorer families following a VAT rate rise, would certainly be a more efficient use of resources than the present general VAT reductions available on some products.

He said that increased revenue from VAT would then allow structural changes to Italy’s three direct taxes – IRPEF (personal income tax), IRES (national company tax) and IRAP (regional company tax).

Following the exclusion of financial income from its base, he continued, IRPEF has changed from that which was foreseen when it was introduced, and has become a too-heavy tax on employees. On the other hand, financial income is being taxed too lightly – creating an incentive to transform, wherever possible, personal and corporate income into returns on capital – and favors speculation on the value of financial assets, rather than encouraging productive activity.

It therefore appears reasonable to Abete to equalize the rates of taxation over all capital income at a level of 18%-20%, in order to neutralize the tax system overall and to bring such taxes into line internationally.

In a period of low interest rates, as at present, it would also cost little to reduce the current 27% personal tax rate on bank interest to the same level. In addition, reasons of neutrality should lead to the taxation of all assets, including property investment, on the same basis.

Given the amount of revenue raised by IRAP, he felt that it was not the moment to call for its early elimination. However, with regard to IRES and IRAP, he considered that, amongst other complexities that require rationalization, their discriminatory bias against labor-intensive production should be rectified. That could be done, he suggested, by increasing IRAP’s tax base to include depreciation, together with a reduction in the rate of IRAP and making it deductible in calculating IRES.

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