Italy Increases Taxes

by Ulrika Lomas, Tax-News.com, Brussels

05 October 2006

Italian Premier Romano Prodi unveiled a 'bash-the-rich' budget last week that was warmly welcomed by trade unions but dismissed as 'theft' by businesses and the right wing.

Prodi had little choice but to cut the country's 4.2% deficit, but did so by increasing taxes rather than cutting spending. "We've done a budget in which my first concern was the rights of the weak," he said. "Those who have less are being strongly helped, so that the country can develop."

Although the budget reduces payroll taxes by EUR6bn in 2007 and EUR9bn in 2008, income taxes are raised immediately by EUR33.4bn, mostly through an increase in the top rate of tax from 41% to 43%, and lowering the floor for the top rate from EUR100,000 to EUR75,000. Lower bands are adjusted to favour the less well-off. This amounts to a savage attack on the middle classes, and is presumably exactly the opposite of what needs to be done if Italians' notorious under-declaration of tax is to be brought under control. Prodi announced measures to punish professionals who don't declare all their income; but successive governments have totally failed in this endeavour and there's no reason to think that the new one will be any more successful.

"It's what we had asked for," Guglielmo Epifani, the secretary-general of Italy's largest union, CGIL, told Corriere della Sera.

Outgoing economy minister Giulio Tremonti said: "The entire thing is made of taxes, and no one has ever seen growth spurred by taxes. The left told voters it would not increase taxes, and the first thing they did was increase taxes. It was obviously a lie, and now it's clear that they lied."

Prodi's economics minister, Tommaso Padoa Schioppa, said the budget should reassure ratings agencies, but it's not likely to reassure the European Central Bank, which is the only rating agency that matters for a euro-zone member.

Employers' association Confindustria particularly criticized a plan to take some of the funds that employers set aside for severance pay and shift them to the state pension system. "This is robbery," vice-chairman Andrea Pininfarina told La Repubblica.

The budget has to be approved by parliament by the end of the year, and Prodi has a bare one-seat majority in the Senate.

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