puts welfare at risk – Corriere.it

The Bank of Italy rejects the flat tax. According to the central bank, the intention, put on paper by the government in the tax reform enabling bill, to gradually arrive at a single personal income tax rate for all taxpayers, represents a risk for a country like Italy which needs to finance a structured welfare system. The head of Bankitalia’s tax assistance and consultancy service, Giacomo Ricotti, said in a hearing before the Finance commission of the Chamber: The model prefigured by the enabling law as the point of arrival – a single rate system together with a reduction in the tax burden – could be unrealistic for a country with a large system of welfareespecially in the light of the public finance constraints. Furthermore, the redistributive effects of such a reform should be carefully evaluated.

To support its analysis, the Bank of Italy has attached an appendix to the report entirely dedicated to examining the flat tax in the countries where it was introduced. And the negative conclusion: The only topic on which research shows a certain convergence is the one against the flat tax, i.e. the consequences on redistribution and inequality: negative effects on these two aspects have been ascertained in some countries, such as the Bulgaria while others, such as Estonia and Slovakia, have been forced to move away significantly from the basic model of the flat tax to avoid the negative consequences on income redistribution and budget balances.

No to the incremental flat tax

The flat tax, explained Ricotti, would represent a unicum among the systems in force in the major advanced economies; a system mainly adopted by economies in transition or developing countries, with a low tax burden and limited welfare systems. The Bank of Italy’s report also rejects the intention to extend the incremental flat tax to employees, ie the application of a reduced rate on more income declared than in the previous three-year period. It is not clear to what extent the extension of the incremental flat tax and the deductibility of income production costs to employees would be effective in limiting the current disparities in treatment between self-employed and employees. instead it is very probable that they increase the complexity of the system. Nor is it clear how the reform can be financed: Many of the envisaged interventions will lead to revenue losses, Ricotti underlined, and therefore

This refers to the need for the delegation to find the appropriate coverage.

Well the simplification

The challenge of the reform, Ricotti said, will be to put into practice the principles which inspire the delegation by keeping together the public budget constraints, horizontal and vertical equity. Pending the introduction of the flat tax, the extension of the replacement regimes could reduce the equity of the system. And, given the public finance constraints, the main objective of the delegation should be to arrive at a different distribution of the overall levy. In terms of equity, this would mean reducing the levy on taxpayers in good standing by recovering resources with the fight against tax evasion. To aim for economic growth, the tax burden should be shifted from production factors (labour and capital) to rents and consumption. On the other hand, the contribution of the bill to legal certainty and the simplification of the tax system is good. This part to be evaluated overall in positive terms