Frenzied Renzi

By Global Tax Weekly

There are some bad habits that Italy has to banish to give itself a fighting chance of avoiding a potentially cataclysmic economic crisis. For a start, a substantial swathe of the Italian population has gotten into the habit of thinking that taxation is a voluntary exercise. And the Government continues to spend money it doesn’t have. The result is a sticky budget deficit which the Government is struggling to contain, and sovereign debt worth 130 percent of GDP and rising. The economy also has a nasty habit of stalling and then failing to re-start. And it is difficult to see how the Government will break the cycle. Although cultural attitudes are largely responsible for rates of tax evasion in any given country, Italy’s tax system seems to provide ample scope for it to take place because a) it is so complex and b) taxes are so high. The recently updated PwC/World Bank ease of paying taxes index puts Italy 141st out of 186 countries. That’s only marginally better than Zimbabwe in 143rd place, and slightly worse than Sudan in 139th. Even more damning is that Italy’s total tax rate on a mid-sized company, represented by the combination of profit, labour and other taxes, is put at 65.4 percent. Who would want to invest in a country where, after finally figuring out how much tax you owe, it transpires that you must hand over two-thirds of your income to the Government? So cutting and simplifying taxes is at least part of the answer to Italy’s problems, for this could help to reduce tax evasion and encourage more investment and growth in the Italian economy. But without commensurate spending cuts, Italy’s fiscal troubles might just be exacerbated. Prime Minister Matteo Renzi claims to be the one with the answers. But despite his youthful vigor, he is still a politician. Italy’s 2015 Budget, recently approved by the lower house, is supposed to be the tonic that saves Italy. The tax cuts contained within in it are claimed to be the largest in Italian history, but there’s also a bit of clever accounting going on – EUR3bn of the EUR5bn reduction in the regional production tax known as IRAP actually went into effect in April, meaning that strictly speaking the 2015 Budget cuts the tax by EUR2bn. Not so clever is the fact that the Budget includes more borrowing to finance certain items of public expenditure. Slashing spending, if it happens, is only going to increase the chances of fracturing the fragile coalition and losing the support of voters – should Renzi ever get the chance to face them, that is. Unless he is Silvio Berlusconi, the average career of an Italian premier is fleetingly short. Canceling bread and circuses won’t help to prolong it.

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