Italy's Political Heavyweights Grapple Over Tax Policy

by Ulrika Lomas, Tax-News.com, Brussels

05 April 2006

Italian Prime Minister Silvio Berlusconi has made a surprise pledge to cut property tax if reelected, as the taxation issue takes centre stage ahead of the general election.

In the final televised debate between the two main competitors, Berlusconi seemingly pulled a rabbit out of the hat in a bid to remain as Italy's longest-serving post-war Prime Minister, by promising to cut tax on home ownership.

At the same time, Berlusconi attacked the fiscal plans of his opponent, Romano Prodi, the former European Commission president who now leads the centre-left opposition coalition, by repeatedly accusing him of wanting to increase the tax burden on savings.

Berlusconi's government has already clashed with with Prodi on tax after the latter revealed that his coalition is considering increasing the rate of capital gains tax on certain financial instruments.

Prodi recently stated on Italian television that he was mulling a plan to tax capital gains at 20%, which would mean a tax hike on proceeds from the sale of government bonds, which are currently taxed at 12.5%.

The Berlusconi camp has also rubbished Prodi's plan to cut the social security contribution burden borne by companies by 5% in the first few months of a new government, calling such a plan unaffordable.

"If Prodi claims he can reduce taxation by 5 percentage points, which requires a 10 billion euro funding, he lies, and he knows he is lying," Foreign Minister and National Alliance president Gianfranco Fini has been quoted as remarking in the Italian media.

Prodi says that he will finance the plan through the increase in capital gains tax, the reinstatement of an inheritance tax and a crackdown on tax evasion.

"If we can crack down on one third of the tax evasion, it would solve the problem with our public finances," Prodi stated.

However, for all Berlusconi's criticism of Prodi's tax proposals, he has largely failed to deliver since sweeping to power in 2001 on the promise of substantial cuts in income tax.

Initially pledging to cut the top rate of income tax to 33% from 45% while cutting the number of income tax brackets to just two, he has only managed a 2% cut in the top rate, while there remain four tax brackets.

Nonetheless, Berlusconi has been hindered by the state of the nation's finances and demands from the European Union that the government reduce its budget deficit back below 3% of gross domestic product, in line with rules governing the stability of the euro currency. Italy's budget deficit has now risen to EUR37 billion ($45.34 billion).

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