Italy's Lower House Approves Tax Reform Motion

by Ulrika Lomas, Tax-News.com, Brussels

28 December 2010

At the end of the parliamentary session and with the help of votes across all parties, the Italian Democratic Party, at the instigation of its National Secretary, Pier Luigi Bersani, was able to pass a motion through the lower house which committed the government to tax reform.

The PDI’s motion, which was also accepted by the government, restates the necessity to form an agreement across all social sectors on a tax reform that would “reduce taxes on workers, professionals and firms, for reasons of equity and for sustainable economic development. The real strategy for exiting from stagnation and high unemployment is through reform, which should begin immediately.”

It points out that any redesign of the Italian tax system should recognise that the country’s principal direct tax on individual incomes (Irpef) is paid, almost exclusively, by those for whom it is subtracted directly from earnings, while tax evasion in Italy has reached between 16.3% and 17.5% of gross domestic product, or between EUR255bn (USD335bn) and EUR275bn.

Any reduction in the level of evasion would provide tax revenues able to be utilised to equalise the levels of contribution between the various categories of taxpayers. The motion therefore points out that, above all, a new attitude for fiscal compliance needs to be constructed to reduce the tax burden on the production sector.

It suggests that improved tax compliance will need, not only “repression and controls”, but also a reduction in the tax burden on individuals and a simplification of bureaucracy, in order to reduce gradually the level of tax evasion in Italy to average European levels. Above all, every euro recovered from the action against tax evasion should then be re-allocated to reduce taxation overall.

The motion emphasises that the present corporate tax rate presents various obstacles to growth; discouraging foreign investment in Italy, penalising the utilisation of internal capital as against debt capital, and taxing differently the income from capital invested in the various forms of business.

Tax reform, it says, should be primarily based on the principle that individual or corporate income should not be taxed at a higher rate than the return on capital. A tax rate of 20% should be established as the reference rate for all types of income.

With regard to Irpef, the 20% basis rate would refer to the lowest rate of taxation within a reduced number of progressive tax levels favouring low and medium levels of income, and a rationalisation of the myriad of deductions and detractions within the individual tax system.

Capital reinvested within a business would be free of tax; a flat corporate tax rate of 20% would be applied on all income earned by a business, including not only limited companies, but also income earned by such as artisans, unincorporated companies and partnerships; and the tax rate on all financial income would be increased from the current 12.5% to the same 20% rate, the average European level, except for interest on Italian government bonds.

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