Italian Government Agrees Tax Cuts To Await End Of Crisis

by Ulrika Lomas, Tax-News.com, Brussels

18 January 2010

Italy’s Minister of the Economy, Giulio Tremonti, in a television interview, and its Premier, Silvio Berlusconi, at a press conference, have expressed the opinion that any tax cuts in Italy will need to await until, at least, the extent of an economic recovery is known.

After the discussions of the last few days, during which Berlusconi was reported to hint at income tax cuts in 2010, but which he later retracted and put into the context of wide-ranging fiscal reform following a meeting with Tremonti, the latter has now emphasized that any tax cuts would depend on three conditions: the economic crisis, the state of Italy’s public finances, and their compatibility with policies in the rest of Europe.

In the television interview, Tremonti reminded viewers that the Italian tax system is extremely complicated, caused by various past adjustments that have accumulated over the years. It is, he said, a system that has been patched up over time, become unjust and needed to be changed.

At present, he confirmed that the government is trying to get to grips with the system before any debate on reforms can be started. He confirmed that the subsequent discussion would be open to all interested parties – trade unions and business leaders, parliament and the European Union.

He referred to suggestions that have been widely made regarding an increase to the taxation of financial income, to compensate for a reduction in personal and corporate income taxes. Policy makers, he said, should remember that bank deposit interest is already taxed at 27%, and that such deposits are in the hands of families in Italy. The tax on government securities and corporate bonds is only 12.5%, but those assets are largely held by institutions, a significant proportion of which pay their taxes abroad. Any increase to taxes on financial income would therefore punish individuals.

With regard to talk late last year of reductions in the rate of IRAP (the regional corporate tax), he recalled that it had been introduced in substitution of other taxes and would be difficult to replace at the moment. He does, however, put IRAP within the class of taxes that have worsened the tax system as a whole, and need to be rationalized.

For his part, Berlusconi took the opportunity of a press conference to make clear that, while the economic crisis continues, it would be impossible to talk of tax cuts. He agreed with Tremonti in confirming that the government was, at present, only working towards a simplification of the Italian tax system.

The examination of tax reforms, he reiterated, would take a significant period of time. He hoped that a year will be sufficient. However, with a complex tax system such as that currently seen in Italy, the time needed to propose proper reforms was an unknown.

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