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Italy Cuts Income Tax, But Other Taxes Rise

by Ulrika Lomas,, Brussels

12 October 2012

Unexpectedly, after seven hours of discussions, the Italian Cabinet has approved a further ‘stability law’ that contains a much-wanted reduction in individual income tax rates, albeit at the cost of tax increases in other areas.

The new decree is revenue-neutral, and is thereby expected to have no effect on the country’s fiscal deficit. The reduction in income tax rates, at a cost of some EUR5bn (USD6.5bn), has been balanced by public spending cuts and by other tax increases. Italian Premier Mario Monti expressed the hope that the government’s move will convince Italians that austerity is not a “vicious circle”, and that “when there are signs of (economic) stabilization, some relief can be allowed” by the government.

It was only a short time ago that Monti was, instead, pronouncing that, while Italian tax burdens were excessively high, the government’s attention on balancing the country’s fiscal deficit could not be distracted, and any talk of reduced taxation would be premature.

From 2013, individual income tax rates will be reduced by 1% for its two lowest bands, but there has been no increase in the tax’s threshold. The rate on taxable income up to EUR15,000 will be reduced from 23% to 22%, and on income of over EUR15,000 and up to EUR28,000 has been reduced from 27% to 26%.

However, to fund that tax cut, the government has had to maintain a hike in the rate of value-added tax (VAT) from July next year – of 1% on the current rates of 10% and 21%. That is half of the VAT rate rise previously approved in the ‘Save Italy’ budget in December last year that had programmed 2% increases from October 1 this year, and which were later delayed to next July.

At the same time, each credit or deduction in the income tax code will now be reduced by EUR250, and a EUR3,000 maximum overall deduction introduced, for incomes above EUR15,000, while war and disability pensions above EUR15,000 annually will also be subject to income tax.

In addition, the government has formally announced its decision to introduce a financial transactions tax. That will presumably to be coordinated with the rest of the Europe, as and when it is so decided, although it was confirmed that it would not apply to transactions in government bonds.

As could be expected, in an immediate reaction to the news, Codacons, the Italian association whose object is to protect consumer rights, protested that, as the government had previously professed to be using all of its efforts to avoid the programmed VAT rise, its new measures were a “practical joke” being played against consumers.

While pointing out that the reduction in income tax proved that the overall resources were already available to cancel the VAT rate rise, it protested at the latter’s application in the present economic circumstances, as it will further depress domestic consumption that is already falling sharply, and will have a significant effect on average families, especially those with more children.

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

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