Flat tax and Irpef, who really pays taxes (and who will pay them even less) – Corriere.it

Let’s consider a professional with fees close to the new threshold of 85,000 euros, his imputed income will be well above the limit of the last income tax bracket, equal to 50,000 euros. An employee with that income pays a marginal tax rate (including surtaxes) higher than 47%: more than three times the marginal tax rate of 15% to which the professional is subject. The example made by Giuseppe Pisauro, former president of the Parliamentary Budget Office and full professor of Finance at the Sapienza University of Rome, explains the title chosen by the newspaper Domani, on the front page: With the flat tax of 85,000 euros, employees pay triple taxes. And it also explains the cap of the article: Serie A and Serie B citizens. Because, to use Pisauro’s words again, the first paragraph of article 53 of the Constitution states that “everyone is required to contribute to public expenditure according to their ability to pay”. It is really difficult to understand which elements can make a professional’s ability to pay less than a third of that of an employee with the same income.

Raising the flat tax ceiling

Pisauro does not find the reasons given for raising the ceiling for the flat tax convincing, or at least insufficient: The justification, also used in other cases, for which the scheme favors the emergence of a tax base must be considered seriously but the size of the tax discount so great that in all probability the revenue gain from those who emerge is largely insufficient to compensate for the loss of revenue from those who already paid (as has been documented for the dry coupon on rents). The other justification put forward, that of simplification, frankly laughable. It could still be valid for the regime prior to 2019, with a threshold of 30,000 euros in revenues (corresponding in any case to an income equal to the average), certainly not with the new threshold that brings us into the 5-10 percent of the richest taxpayers. More generally, it seems to Pisauro that the new ceiling on the flat tax – which according to the calculations of the Ministry of the Economy should allow at least another 100,000 VAT numbers to enter the subsidized regime – makes the separation between the two types even clearer in Italy ( very different in terms of tax burden borne) of taxpayers: The further extension will imply that de facto almost all professionals and a large part of self-employed workers will fall under the flat-rate scheme. Thus there is a clear separation between the tax regime of employees and pensioners, on the one hand, and self-employed workers and professionals, on the other. Due to its breadth, it is, at least among advanced countries, an extreme case of preferential treatment.

Inefficiency in self-employment and purchase of capital goods

A preferential treatment that generates, Pisauro accuses again, well-known negative effects: It generates inefficiencies in the self-employment sector itself, as it discourages the adoption of more complex organizational forms (better to work alone than in an associated firm) and the purchase capital goods (investment costs are not deductible). More generally distortive with respect to the choice of the form of employment between dependent and self-employed work (the share of self-employment in employment in Italy is double that of France and Germany and in Europe only lower than Greece and Romania, we are certain that it is a good idea to increase it?). Not only. As underlined in an article on lavoce.info by Bruno Anastasia, former director of the Observatory on the regional labor market of Veneto Lavoro, the flat-rate scheme helps to make even those professionals and self-employed workers who remain in the ordinary scheme pay more. Between 2018 and 2020 self-employed workers – thus identified on the basis of the prevailing income – fell from 3.2 million to 2.4 million, almost 800 thousand fewer, equal to a quarter of the total. At the same time, the personal income tax generated by self-employed workers decreased by over 4 billion, going from almost 24 billion to 19.5. This is despite the increase in the average personal income tax paid by each taxpayer, which rose from 7,400 to 8,000 euros. The audience therefore appears to have been strongly selected: fewer taxpayers with higher average income and higher average tax. The reason for this trend can be traced back to the shift towards preferential tax regimes and, in particular, towards the flat-rate regime, extended in 2019 to revenues and fees of up to 65 thousand euros. The taxpayers who joined these schemes increased by almost 600 thousand units between 2018 and 2020 (from 978,272 to 1,535,840). The revenue from the substitute tax – which replaces not only the national personal income tax but also the regional and municipal surtaxes as well as VAT – amounted to 2.3 billion (against the approximately 4.5 billion of lower income tax from self-employment). It should be added that, while VAT evasion has declined in recent years, that of Irpef continues to increase.

Irpef in 20 years

The table for the years from 2000 to 2020 that Anastasia publishes, on who and how much pays Irpef in Italy, shows how the share paid by pensioners continues to rise (if at the beginning of the century they generated 20 per cent of Irpef , we are now around 30 percent), that of employees fell in 2020 due to the pandemic (as had already happened at the time of the 2008-09 crisis) but it fluctuates in the twenty years considered in a narrow band between 54 and 56 per cent, while that of self-employed workers, already low, began to fall further already in 2019, before the pandemic effect was added, with the raising of the threshold of the flat-rate scheme to 65 thousand euros (the contribution of self-employment continuously decreased : before the 2008 crisis it was worth 18-19 percent of the total Irpef, now it is worth 12 percent). Can we conclude that the country is relying too heavily on retirees? Anastasia wonders.

Tendency to under-report income

Anastasia also recalls another distorting effect of the flat tax and the flat-rate regime, already highlighted, again on lavoce.info, by Alessandro Santoro, president of the commission that drafted the report on the unobserved economy attached to the update note to the Def (Nadef) : the tendency to under-declare income when there is a risk of exceeding the threshold which allows re-entering the preferential tax regime. Santoro concluded by complaining that in our country the political debate is concentrated on the forms of flat tax and simplified regimes for the self-employed and individual entrepreneurs which, according to the proponents, should reduce tax evasion thanks to the reduction of rates. Also on this issue the Report contains some interesting insights carried out by the Revenue Agency and the Department of Finance. The Revenue Agency focused on the “minimum” regime – originally introduced in 2007 – highlighting how it did not contribute, at least in the three-year period 2012-2014, to reducing the tax gap also due to the phenomenon of “false minimums”, i.e. taxpayers who were able to benefit from the facilitation only thanks to the declaration of a turnover below the threshold of 30 thousand euros. The analysis carried out by the Department of Finance on the flat-rate regime introduced in 2019, albeit of a preliminary nature, also highlights a self-selection effect for taxpayers with revenues and fees below the maximum threshold of 65 thousand euros in order to take advantage of the tax replacement provided for by the flat-rate regime (it is true that, in raising the ceiling to 85,000 euros, an anti-sly trap was envisaged at 100,000 euros, but the effect could be limited).

Additional regional and municipal income tax

One last shot by Pisauro on the regional and municipal income surtaxes, which are also not due by those who choose to join the flat-rate regime extended to 85,000 euros (a ceiling that, as known, Matteo Salvini would have liked to set at 100,000 euros): A fine example of sick federalism (singular, given the part from which the proposal comes): why shouldn’t the same subject contribute to the expenses of either his municipality or his region? But in the end perhaps the only motivation is to favour, albeit disproportionately, an important segment of one’s electorate.