MNI EXCLUSIVE:Italy To Cut Deductions To Make Way For Flat Tax

--Italy Could Save E10 Billion By Cutting Deductions, League Official Says

--This Would Counter E10-12 Billion Cost Of Flat Tax

By Silvia Marchetti

     ROME(MNI) - Italy's government plans to scrap most tax deductions at the

same time as it introduces a two-level "flat tax" with a much lower maximum

headline rate next year, sources within the governing coalition parties and

Economy Ministry told MNI.

     Deductions for health could be reviewed, together with home renovation

credits and an E80 monthly bonus for workers introduced by former Democrat

premier Matteo Renzi in 2015, saving roughly E9 billion, the sources said.

     The government plans to save at least E8-10 billion over the next two years

through a review aimed at rationalising fiscal incentives and credits, according

to a recently approved fiscal plan which will form the pillar of the budget

document to be defined in October. These savings compare to the E10-12 billion

cost of introducing a 15% flat tax for families with a yearly income of up to

E50,000, according to the right-wing League Party.

     "A task force has been set-up at the Treasury to identify which tax

expenditures should be reviewed and scrapped, but it's still a work in progress

which will take months. We'll have a clearer picture by September, in time to

define the budget plan, " said a source close to the Economy Ministry.

     Average net taxation in Italy already stands at 19%, a top League official

noted, despite headline rates running from 23% to 43%. Under the flat tax plans,

earnings above E50,000 would be taxed at 20%.

     "It should not be that hard to cut enough tax expenditures to make up the

resources to implement a 15% flat tax. It will be the result of a balanced

compromise," the League official said, adding that the changes should save more

than E10 billion and should not affect deductions aiding low-earning families.

     "The goal is to rationalize the crazy amount of existing deductions, so

some will be cut, others adjusted and made progressive depending upon income

levels".

     --MINI-BONDS FOR TAX CREDITS

     Recipients of longer-term tax credits, such as deductions for

environmentally-friendly building modifications, which can often by claimed over

a 10-year period, would be compensated with government-issued mini-bonds, the

League official said.

     "It's like a securitisation," the official said. "Frozen tax credits worth

millions of euros would be made liquid and injected into the economy".

     Tax deductions would no longer be used as a tool to favour certain sectors,

the official said, adding that troubled industries could instead be assisted in

a more transparent way via state spending.

     According to a report by the Italian parliament, 500 different tax

deductions and credits at local and national level cost roughly E61 billion each

year. The European Union Council has repeatedly urged the government to reduce

its "use and generosity of exemptions and preferential" fiscal treatments.

     The cost of implementing a flat tax has prompted resistance to the idea

from the League's partners in the governing coalition. But the Five-Stars

Movement is strongly in favour of eliminating deductions.

     "There are too many absurd tax exemptions within Italy's labyrinthine

fiscal sector, like for company canteens and workers' meal coupons, which must

be eliminated, as they are obviously unjustified and outdated", said a

Five-Stars source.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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