The tax system is changing. Following a year of work in committee and the approval of the enabling act, the reform now enters its second and most concrete phase with a view to modernising a 50-year-old system whose principles were established before the moon landing for an Italy that no longer exists. The provisions will be discussed in detail here. The reform was ushered into the pipeline by Luigi Marattin (Italia Viva), member of parliament and chairman of the Finance Committee of the Italian Chamber of Deputies, who remarks that it entails a substantial renewal in terms of the number of “qualifying interventions” it sets out.
Mr Marattin, what are the principles and directions? What is the timeline?
The objectives are clearly stated first in the parliamentary document approved on 30 June, and then in the enabling act itself (Article 1), currently being examined by the Finance Committee of the Chamber of Deputies. We have one of the most complex tax systems in the world, and it must be rendered simpler and more income-growth oriented: now it weighs too heavily on the determinants of economic growth. Every intervention we are making and will make must pass this double “admissibility” test. In terms of timing, a first part of the reform is addressed by the budget law, entailing substantial interventions on personal income and regional production taxes. The rest will come in the form of the enabling act, the final approval of which, in my opinion, must take place by winter, and the implementing decrees of which must be approved by summer. By 1 January 2023, therefore, Italians will have had gone through two stages to achieve a slightly lighter and slightly simpler tax system.
An anticipation was given in the budget law with the reform of the income tax rates from five to four. How do you rate it as a start?
A great start. The two main defects affecting personal income tax were corrected: marginal effective tax rates (rendering a measure of the incentive for income growth) were too uneven, and average effective tax rates were too heavy on the middle class. Both defects were rectified and, contrary to what some trade unions were saying, 95% of the 7 billion spent goes to employees and pensioners (who constitute by far the largest part of the personal income tax population) and 90% to the three lowest income brackets. The average per capita amount is sometimes low simply because roughly three quarters of personal income tax taxpayers come from the first two brackets. We will have to continue with the enabling act, with the aim of making our income tax lighter and simpler. Maybe then we will no longer need a 341-page manual to fill in a declaration.
Our tax system must be rendered simpler and more income-growth oriented
What about VAT?
The parliamentary document and the enabling act both contemplate a reorganisation and simplification of VAT. I think the time is ripe to review both the number of rates (today we have four, plus exemption) and the distribution of goods and services within them, which is often not entirely rational, fair and efficient. A simpler VAT would help not only economic operators but also the fight against evasion, since it is the tax with the largest tax gap (difference between taxes collected and what they would collect in a perfect compliance regime, ed) in relation to total revenue.
The plan is to revamp the old system and build a system that can grow the economy. What are the crucial steps on this path?
A fundamental step is to eliminate the regional production tax, which began under the budget law, starting on 1 January, for nearly one million taxpayers (individuals and sole proprietorships). Yet we still need to move on. Irap is a production tax that has had its day: a country seeking to return to growth cannot maintain a complicated tax that also affects production units not generating profit simply because they accumulate labour and capital.
We then need to simplify corporate taxation, reducing and rationalising the distances between statutory and fiscal balance sheets. The personal income tax reform, whose first module started already on 1 January, is to be completed by further reducing the tax burden on labour and changing the mechanism of the hundreds of tax expenditures.
And then some less ‘sexy’ but crucial points: the codification of tax rules, a tax justice reform, and reform of tax collection from formal compliance to one based on results. More still, if the political conditions and timing are right. Although we must not get carried away. it is much better to limit ourselves to a few qualifying measures we know we can do rather than deluding ourselves into thinking that we have to carry out the epoch-making reform that will be studied a century from now.
We have some 20 taxes in our system (unknown to most people) which together generate a couple of hundred million in revenue per year. It costs more to run them (between collection and compliance) than to cancel them.
How can we reduce the tax wedge? What is the best strategy? Increase workers’ pay packets or reduce costs for employers?
On low incomes, the tax wedge on the worker’s side is already very low. There, if anything, the contribution wedge weighs heavily, which, in fact, in addition to other measures, we have begun to reduce from 1 January for low-income workers, with a 1.5 billion allocation that we aim to make permanent. Confindustria is right on this point, and we will have to take action in this area too, perhaps in connection with the steps to replace the regional production tax (Irap) with a corporate tax that we have in the pipeline.
What will be done for the self-employed and VAT holders, who have suffered greatly from the crisis?
The first half of the reform, in force since 1 January, also benefits them. Nearly one million of them no longer pay this Irap production tax, in addition to those in the flat-rate scheme, who already do not pay it. Turning to personal income tax, they benefit from reduced rates, the increase in deductions by type of income and the increase in the no-tax area. In the ‘second half’ I hope we will be able to do other things, such as, for example, greatly reducing withholding tax and allowing the second advance payment of direct taxes, that of November, to be paid in instalments. By doing so, we will avoid that many people often have to go into debt in order to pay taxes on an income they not only do not know, but sometimes have not even fully realised yet.
One of the general principles is to cut micro-taxes. How will it be implemented?
We have some 20 taxes in our system (unknown to most people) which together generate a couple of hundred million in revenue per year. It practically costs more to run them (between collection and compliance) than to cancel them. The parliamentary document and the enabling act expressly provide for their removal. If the tax system wants to be a growth-promoting factor rather than an obstacle, it must also deal with these seemingly small things, which are actually important for people’s daily lives.
From 2014 to 2019, evasion of direct and indirect taxes was reduced by almost 12%: from 98.2 billion to 86.5 billion
Another aspect is the fight against evasion and avoidance. What will it look like? Will it also affect foreign tech giants?
In the meantime, I would like to mention what has been achieved so far. The Ministry of Economy has published the latest available data. From 2014 to 2019, evasion of direct and indirect taxes was reduced by almost 12%: from 98.2 billion to 86.5 billion (when also considering tax evasion, the reduction is from 109 to 99 billion). Those who accuse us of not saying enough harsh words against evasion should be reminded: we prefer facts, because there are enough people talking around, it seems to me.
For the future, we need to continue on this path. The digitisation of taxation has brought this about: electronic invoicing, electronic transmission of receipts, cross-referencing of databases. This is the surest way to combat evasion. We must continue in this way, developing the pre-filled VAT form, which is making its debut this year on an experimental basis. And this digitisation must go hand in hand with simplification: a simpler system that is also easier to control.
As for the tech giants, let us not delude ourselves: the solution lies in international action, certainly not in individual national governments. The good news is that, after the results of the G20 in Rome, a solution finally seems within reach.
