Monti Puts Forward Italian Tax Policy Framework

by Ulrika Lomas, Tax-News.com, Brussels

22 November 2011

Mario Monti, the new Italian Prime Minister and Economy Minister, has won confidence votes in both houses of parliament for his government’s future reform programme which, it is hoped, will strike the right tone for the financial markets, but is short of much detail.

Monti’s government of technocrats looks to cut through the prolonged debates that have persisted recently between Italy’s fragmented parties, and to take urgent policy decisions between now and the general elections, that are due in 2013.

He noted, in his parliamentary remarks, that international investors own almost half of Italy’s public debt, and the country has to convince them that it has found the right path for a gradual but sustained reduction in its ratio of debt to gross domestic product (GDP).

He pointed out that, in the past, Italy had relied too much on increasing taxes on employees and businesses to balance its public finances, rather than making permanent reductions to the government’s current spending. That, he said, had to change to provide some space for economic growth in the private sector, and, in that respect, the new government would take rapid decisions on the measures to be taken, including reforms to the Italian tax and social security systems.

One of the government’s priorities, he added, will be the fight against tax evasion – “not only to increase tax revenue, but also to reduce tax rates”. Reducing tax evasion could produce significant cuts to the burden on regular taxpayers, he said.

He looked for a further decrease in the transactions able to be completed in cash, to accelerate the sharing of information between the various administrative offices, to strengthen and put into operation the systems available to measure inferred incomes, and to improve the quality of tax assessments.

Monti disclosed that, as the tax burden on Italian property assets is particularly low, relative to other European countries, and as Italian property taxes now exclude taxpayers’ first residencies (also said to be an anomaly in European terms), the new government would also look at the further changes to the local taxation of property that are due to be operative from 2014.

It has been suggested that it could be decided either to bring forward the new unified property tax (IMU) from 2014 to 2012, extending it also to first residencies, or to introduce an additional local ‘service tax’, with exemptions provided for those on low incomes. Such changes could also be accompanied by a revaluation in the official value (‘valore catastrale’) of properties.

Finally, Monti concluded, the reduction in public spending and the sale of state assets, increased tax revenues from the above measures, and further rises in taxes on consumption - presumably, value-added tax (VAT) – should provide funds for reductions to individual and corporate income tax rates, without increasing Italy’s fiscal deficit and, hopefully, stimulating economic growth.

As much of the new government’s proposed policy framework compares favourably with their previously-expressed wish list, Italian business groups have largely welcomed its bias towards economic growth. However, Confcommercio, representing Italy’s commercial and retail sector, expressed doubt concerning any future trade-off between direct and indirect taxes, as a rise in VAT, for example, might reduce consumer spending and have the effect of restricting growth.

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