«Irpef is an unfair tax». This is how it should be reformed – Corriere.it

Irpef needs a general revision to make it a tax that is not only “simpler” but also respectful of progressiveness. The director of the Revenue Agency, Ernesto Maria Ruffini, is convinced of this, who during the hearing on 17 May in Finance Committee in the House on the delegation for tax reform he explained that the principle of universality of personal income tax is today “undermined by the provision of specific exemptions and by the use of substitute taxation for distinct types of income which cause a distortion of the system, so that for the same individual income the taxation may not be the same.”

Personal income tax undermined by inefficiency and inequity

The problem also derives from the fact that over time Irpef has been the subject of numerous interventions, explained Ruffini, which «have made the tax very complex from a technical point of view, as well as characterized by various critical issues as regards efficiency and fairness of taxation”. The current tax system distinguishes the payment of Irpef on the basis of the withholding tax and the annual return. Therefore, the perimeter of the tax reform is restricted to taxpayers who do not pay taxes with withholding at source. In 2022, tax revenues amounted to €544,528 million, those deriving from personal income tax 269,078 billion euros. 81.9% of taxes are paid by employees and pensioners, or 14.5% of taxpayers who pay Irpef based on the declaration (tax evasion is estimated at more than 100 billion euros). The problem is that employees, the self-employed and retirees have specific tax deductions, which makes their tax position different for the same income.

Around 50,000 euros the differences are reduced

Furthermore, as the National Accountants Foundation explained to Corriere recently, the four-rate Irpef structure in force for the 2023 tax year provides for a different No Tax Area (NTA) for the three main types of income. In particular, for employee income, the NTA is equal to 8,174 euros, for pension income it is equal to 8,500 euros, while for self-employment income it is equal to 5,500 euros. Employee income also benefits from the supplementary treatment of 1,200 euros per year up to 15,000 euros of taxable income (this is the former Renzi bonus of 80 euros, which later became structural at 100 euros per month). As the taxable income rises and approaches 50,000 euros, the differences between the deductions tend to decrease and finally zero for all three types of income at a taxable amount of 50,000 euros. This means that the net personal income tax is the same for all three types of income in correspondence with this taxable threshold. The differences between the deductions are instead very significant in the lower part of the income curve.

The poorest pensioners and self-employed are the most harassed

In short, the poorest pensioners and self-employed are also the most harassed. The differences between the deductions, combined with the supplementary treatment of 1,200 euros due to employee income up to 15 thousand euros, determine significant differences in the net Irpef (see the table here). In particular, corresponding to 15,000 euros of taxable income, pension income has a net Irpef of 1,543 euros higher than income from employment, a difference which rises to 2,088 euros for income from self-employment (it must be said that, in case of an income of only 10,000 euros from employment, the tax becomes negative because amply compensated by the former Renzi Bonus of 1,200 euros per year). These differences decrease as taxable income increases. On the other hand, for income from self-employment, if the requisites are met, there is the possibility of opting for the lump sum regime with a flat tax of 15%. This regime is convenient as income increases, even if a direct comparison with Irpef is not directly feasible.

What to expect from the reform

During the hearing in the Finance Commission in the Chamber, Ruffini in fact explained that «the taxable base of the tax is greatly eroded as many categories of income are removed from progressive taxation and subjected to proportional taxation. Furthermore – he added – there is a wide variety of tax expenditures, including deductions from the tax base, tax deductions and tax credits which make the system complex and difficult to manage and control by the administration ». But what can we expect from the enabling law on taxation? This «provides for an organic overhaul of the system which, in compliance with the principle of progressiveness, will have to make a simplification of the process of determining the incomeor, a gradual reduction of the tax, a revision of the income brackets (from 4 to 3, ed), tax rates, deductions from the tax base, deductions from gross tax and tax credits», concluded Ruffini. The Government for employee income and pension income wants to eliminate the personal income tax differences and, therefore, one can imagine an improvement for pensioners and a decrease in the benefit for employees, who could however recover a little thanks to the second criterion with the possibility of deducting expenses incurred “even on a flat-rate basis” (such as transport to the workplace or the equipment needed to carry it out).

But what will happen to the 100 billion tax evasion?

Clearly, any effective reform should keep in mind the principles of impartiality and transparency, which in turn would require taxpayers to pay taxes with a single system, that of the declaration (thus also responding to the request for simplification, as well as transparency). Income from employment and self-employment, as well as real estate and financial income, would be treated in the same way. Instead, the implementation of the tax delegation seems to pay more attention to who pays taxes based on the annual return. However, by reducing the number of rates, progressivity in relation to the ability to pay is also diluted. But how much will all this affect the “tax gap” of 100 billion euros of tax evasion? Apparently from the first calculations, very little.

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