MNI: Italy To Cut Tax Bands, Incentivise Investment-Officials

The Italian government will this week present a draft reform proposing tax cuts for workers and business, government sources told MNI, adding that the changes would not compromise fiscal sustainability.

After months of work led by Deputy Finance Minister Maurizio Leo, a delegation law will be approved by the council of ministers later this week and will be sent to parliament for amendments and final approval, sources said.

The reform will reduce the number of tax bands from four to three and will create new deductions for the 24% corporation tax, for productivity- or profit-boosting reinvestment and for hiring people over 50 or on the universal basic income, they said.

Last-minute discussions are continuing on the precise changes to income tax thresholds. One possibility could be to merge the 25% rate between EUR15,001 and EUR28,000 of annual earnings with the 35% from EUR28,001 to 50,000, to create a new 28% rate, one source said. Another would be to raise the threshold for the lowest 23% rate and set the second-lowest rung slightly above 30%, sources said.

In 2022, income tax provided EUR205.8 billion, 38% of total public revenues.

“One of the principles of our reform is that nobody will end up paying more than before. They will keep the same at a minimum,” one source told MNI.

The corporation tax changes aimed at boosting productivity and hiring via more reinvestment of profits are part of Prime Minister Giorgia Meloni’s drive to divert more Italian capital to productive investment. (See MNI: US Subsidies Prompt Italy To Boost Tax Incentives-Sources)

The new delegation law for the reform will substitute an earlier one which was sent to parliament under Prime Minister Mario Draghi but failed to be approved. Under Draghi, Italy has already reduced the number of tax bands from five to four.

FISCAL SUSTAINABILITY

Officials working on the reform say it will not increase the fiscal deficit and could even raise public revenues.

“The reduction of the corporation tax can be partially offset by more income tax via new hirings,” one said.

Overall, it would reduce the total number of corporate deductions, now more than 600, simplifying Italy’s notoriously complex tax system.

Officials hope a simpler system, which will allow for a pre-declaration which can be updated later, will encourage people not currently paying tax to declare their income, as has occurred with the flat tax for the self-employed.

The government intends to draw up a new tax code during the law’s parliamentary approval process, as it moves closer to a flat tax system advocated, with different variations, by the parties of the right-wing coalition during last year’s election.

“It’s a five-year process and this will be a huge step after the limited progress which was all we were able to make in the last budget,” the source said.

The reform could also modify taxes on capital gains and financial investment income, one of the sources said. One of the objectives of Meloni’s government is to increase the portion of Italian savings deployed to purchase Italian assets following the conclusion of the European Central Bank’s bond-buying programme.