Banks To Pay For Berlusconi's Tax Cut Pledge

by Ulrika Lomas, Tax-News.com, Brussels

22 May 2008

A package of tax cuts which is being worked on by the new government of Prime Minister Silvio Berlusconi will be paid for partly by an increase in taxation on banks, it has emerged.

According to Italy's Economy Minister, Giulio Tremonti, the tax cuts were to be approved by the government on Wednesday, and are worth about EUR4bn.

The package was expected to contain proposals for the elimination of tax on an individual's primary residence (known as ICI), which is used to fund local government, at a cost of EUR2bn. The government has also promised to cut tax on overtime.

Reducing Italy's overall tax burden was one of Berlusconi's key election pledges, and helped him return for his third stint as the country's Prime Minster following last month's polls.

Before his term is over, he wants to trim the top rate of income tax from 43% to 33%, and reduce the nation's overall tax burden to less than 40% of gross domestic product, from its current level of more than 43%.

However, a rising budget deficit has left his centre-right coalition government with precious little fiscal room to manoeuvre, meaning that certain taxes may have to go up before he can deliver more populist tax cuts.

The new tax measures against banks are to be presented next month, along with the government's new economic plan. Tremonti has hinted that the new tax would target banks' earnings, but has stopped short of suggesting that this would amount to some form of windfall profit tax.

It is also thought that oil companies will pay higher taxes, and that public spending will be reduced in order to make room for the tax cuts, while keeping the government's budget deficit in check and within European Union fiscal limits.

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