Italian Fiscal Decentralization Finds Support

by Ulrika Lomas, Tax-News.com, Brussels

22 April 2010

CGIA, an Italian association of artisans and small businesses, has produced statistics showing the high proportion of taxation concentrated in central, rather than local, government in Italy, which is said to have an effect on the low level of tax compliance in the country.

CGIA found that, in 2008, 77.5% of taxes collected in Italy go the central government and only 22.5% elsewhere (to the regions, provinces or municipalities). With total tax revenues at EUR457bn (USD612bn), EUR355bn goes to the Italian government, while only just over EUR102bn finds its way into expenditure by local authorities.

That means that the spending autonomy of the local authorities in Italy is much reduced. However, the experience in other European countries, it says, is that there is a strong correlation between the level of fiscal centralization and the tax burden a country puts on its citizens.

CGIA has made a comparison between the level of taxation and central government expenditure in Italy and other European countries. While in Italy the centralization of taxes reached 77.5%, the incidence of taxes on gross domestic product was over 29%. In contrast, the comparable figures in Germany were 49.4% and under 24%, and in Spain were 50.7% and just over 21%, respectively.

The association has also found that the greater the percentage of taxes kept by central government, the less taxes are willingly paid as taxpayers lose connection with why they should contribute, and avoidance increases.

Given these results, CGIA is convinced that it is of absolute necessity that the delegated authorities, foreseen by the law approved in May 2009 to introduce fiscal decentralization, should be delineated as soon as possible. The law contained a period of two years for the finalization of those delegated authorities, and five years of transitional arrangements.

CGIA underlined that the major objectives of fiscal decentralization are to realign the areas where taxes are raised with the areas where government spending is made, and to make local authorities more responsible for their budgets and, hopefully, more efficient. The latter, it is expected, will decrease government expenditure overall and allow a reduction in the country’s tax burden.

Part of the Italian government’s present policy on overall tax reform does include fiscal decentralization. Giulio Tremonti, the Italian Minister of the Economy, has described the present system as one in which “the poor of the rich regions finance the rich of the poor regions,” and has confirmed that the government has already begun working towards decentralization.

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