MNI SOURCES: Italian Parties Try To Hobble Draghi's Tax Reform

Italian parliamentarians may clip the wings of a long-awaited overhaul of the country's messy tax system, setting up a potential clash with Prime Minister Mario Draghi, sources from the government and from the legislative Finance Commission working on a guidelines document to fix parameters for the reform legislation told MNI.

With political parties unable to agree on more than a minority of the possible changes to the tax system identified as candidates for the reform, they now look likely to pare back the guidelines to restrict the government's actions from the outset, several sources said. Another possibility, favoured by the centre-right Forza Italia party, would be to leave the guidelines vague, in the knowledge that the reform eventually produced would be a modest affair anyway.

The guidelines document will be formalised in a so-called delegation law Italy has promised by July 31 under its application for NextGenerationEU funds to rebuild the economy after the Covid emergency, and will give Draghi 14 months to prepare the detailed fiscal reform legislation and send it back to parliament. The document must be submitted by June 30 in order to meet commitments to the EU, a Forza Italia official observed, adding that leaving its language vague would mean no party would have to commit to much and would allow parliamentarians plenty of scope to prevent Draghi from proposing reforms they dislike.

DRAGHI TO RESIST

"An honourable compromise should be found to not put in jeopardy the European funds," the Forza Italia official said. But most other parties contacted by MNI, including the right-wing League, favoured the other option of hobbling the reform from the start by narrowing the guidelines. This would avoid the danger that Brussels could refuse to pay future NexGenerationEU tranches if it deems the tax reform finally implemented falls short of its original promise, argued a source from the populist Five-Star Movement.

Either approach proposed by the parties would mean that Draghi would have little chance of implementing major changes to the tax system, which has been widely identified as a contributor to Italy's persistent economic malaise. A government source told MNI the prime minister would not allow himself to be hemmed in by the political parties in this way, and did not want them to limit the scope of the tax reform. But the source provided no comment on how Draghi might stop them.

The draft document, seen by MNI, lays out 13 reform topics, together with party recommendations on each. But the measures likely to eventually pass into law are far fewer. These could include changes to income tax, providing more incentives for families and for women to join the workforce, the introduction of a single taxpayer identifier, and incorporating a regional tax on economic activity into corporation tax. There also seems to be agreement on restoring a separate income tax regime for entrepreneurs, which was previously established in 2017 only to be abolished in 2019 and which cut levies to a low flat rate if profits were reinvested.

EASIER TO AGREE ON CUTTING TAXES

Other key areas identified in the document, such as taxes on wealth and financial income, as well as reforming the handling of tax cases by the courts, have little chance of prospering, a government source said.

While all parties agree on the broad objectives of simplification and creating a tax system which promotes growth, as well as reducing the share of taxation in national income, they differ on the details. Right-leaning parties want a general reduction in taxes, while the left wants cuts to favour those on low-to-medium incomes, and there is disagreement on how to raise levies to make up for cuts elsewhere.

"If we only go for what we agree, the system would be unsustainable because we need to compensate for what we lose," said the Forza Italia source. Officials from the League and the centre-left Democrats made similar comments to MNI.

The topics identified in the document include taxation of independent workers, tax rebates and redistribution, as well as local taxation and tax collection. This is in addition to financial income, legal system reform and potential new taxes.

All of the parties in Italy's parliament are working on the document, including the far-right opposition party Brothers of Italy, which sources said had contributed to discussions in a "constructive" way.