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Italian Tax Package 'Positive For 99% Of Taxpayers'

by Ulrika Lomas,, Brussels

25 October 2012

With the Italian government’s package of tax measures within its new ‘stability law’ under some criticism in parliament, Minister of the Economy Vittorio Grilli has responded by quoting the Italian Revenue Agency’s opinion that 99% of taxpayers will gain from the package.

Designed to be revenue-neutral, given the government’s requirement to keep intact its overriding priority of balancing Italy’s budget by the end of next year, the new decree contains, in essence, a 1% reduction in individual income tax (IRPEF) rates from January 1, 2013, for the two lowest bands, funded by a 1% increase in the current 10% and 21% rates of value added tax (VAT) from July 1, 2013, and restrictions on tax credits or deductions, effective against 2012 earnings, for taxpayers on annual incomes above EUR15,000.

The latter has caused more than a little discontent, as individuals have obviously been unable, during this year, to arrange their tax affairs to take account of the changes, while the VAT rate increase has also been much discussed, largely because those on the lowest incomes can be expected to gain little from the reduction in IRPEF rates, while it has been said that the rise in VAT could have a significant effect on families, especially those with more children.

However, on the contrary, Grilli predicted, during his testimony to a parliamentary committee, that 99% of Italian taxpayers would see a net tax benefit between the reduction in IRPEF rates and the curtailment of tax credits and deductions.

He explained that, according to Revenue Agency calculations, those tax measures would affect 40m taxpayers, and would be of a guaranteed net benefit to around 30m of them. On the other hand, only some 450,000 taxpayers were guaranteed not to gain or would lose from the measures.

Overall, from the package, the net gains will accrue for 54% in favour of employees, 34% to pensioners, and 10% to the self-employed. The average benefit per taxpayer from the reduced direct taxes will be EUR160 annually, while the highest tax cut of EUR220-EUR230 will accrue to those on incomes between EUR25,000 and EUR45,000 per year.

According to the government, he added, the 1% reduction in the two lowest IRPEF rates was preferable to a cut in VAT of 1%. The combination of a cut in direct taxes and increase in indirect taxes, he said, will have a positive impact on redistribution and equity within the Italian tax code. As, around one-half of domestic consumption is not subject to VAT, or is subject to the lowest unchanged 4% rate, and as the greatest slice of those goods are sold in supermarkets, Grilli said that families on the lowest incomes will be among those unaffected by the new tax measures.

Finally, he also pointed out that the overall effect of the shift in tax burdens is expected to have a positive effect on the Italian economy – raising its growth rate, or rather reducing the current recessionary decrease in gross domestic product, by 0.1%.

TAGS: individuals | tax | economics | value added tax (VAT) | fiscal policy | law | employees | budget | tax credits | legislation | Italy | tax breaks | individual income tax

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