Tax authorities and businesses, because the 120% super deduction on labor costs can work – Corriere.it

Much emphasis is placed on the importance of good taxpayer behavior. A little less on the need for efficient public spending. But then the theme of how to minimize the impact of taxation on the competitive capacity of the Italian country system is almost absent from the debate. Since companies, when they operate in compliance with the law, are the entity that produces the added value and wealth of a country, and they contribute to tax revenue both directly and indirectly, through their suppliers and their workers, it seems particularly valuable to identify ways to prevent taxation from weakening them. And likewise perhaps give more strength to those companies that are able to generate more permanent employment.

How to improve corporate taxation

Firstly, but the trivial thing, obviously trying to minimize the corporate levy. But a second path could also be followed in a decisive way: rewarding companies that produce permanent employment. Today, two companies that produce the same income, one with no employees and the other with many employees, are taxed in the same way. Recognizing that the production of permanent employment is a social as well as an economic good, tax legislation could (rectius should) intervene in favor of the latter, the company that produces work. There is clear evidence of the effectiveness of corporate income tax policies as a stimulus: I remember among all the enthusiasm that the so-called “Tremonti” concessions created 30 years ago.
The solution could therefore simply be to imagine an extra deduction of the costs incurred by the company for the remuneration of permanent employees, for example by bringing the share of these costs deductible for tax purposes to 120%.providing, however, with reference to each worker a minimum threshold (to encourage more decent remuneration) and a maximum threshold (because very well-paid work has its own autonomous sustainability and in the case of top management it even seems to escape market rules thanks to the power of managers).
Also, a further incentive could be imagined for the expansion of the employment base, calculated with reference to the numerical average of a previous multi-year period. The advantage of this proposal compared to the concessions already envisaged today would be that of making the incentive systematic, long-lasting and stable, favoring the company’s strategic choices over time.

How to finance coverage

In the first place, it must be said that the amount for which adequate coverage must be found is equal to the deductibility premium recognized on the cost of permanent labor multiplied by the tax rate applicable to business income, today just over 24% (considering the effect of IRAP). From a strictly financial point of view, this lower revenue from the Treasury will be compensated in the first place with the increase in revenue deriving from the increase in wages and salaries.
It should be noted that even for still low income levels, around 30/35,000 gross euros per year, the average tax rate is around 26%, therefore more than five times the benefit that it is proposed to grant to the company here. It is easy to understand that coverage can automatically come from this mechanism. But even if we wanted to find an additional source of revenue, we could intervene, in a barely perceptible and progressive way, by limiting the deductibility of interest expense for businesses. The gradual nature of the provision together with its limited nature (for example, starting from a partial deductibility of 90% of interest costs) certainly could not undermine the conditions of economic management, and would have the merit of pushing companies towards greater capital strength, has always been a critical factor for Italian companies. In fact, even today the deductibility of interest expense constitutes a powerful incentive to invest in debt instead of resorting to risk capital, the remuneration of which (operating profit) is instead taxed twice: first at the time of its production and then also in occasion of its distribution. Among other things, it will allow us to operate in a manner consistent with the theory of the enterprise developed by economics and business science, which identifies operating income (pre-tax profits plus the result of financial management) as the result of the characteristic management of a company , unlike the net profit (therefore already purified of the economic components of a financial and fiscal nature) which instead represents only the portion of the result of the company’s (operating) activity that goes to remunerate the risk capital.

* Full Professor of Economics and Business Management and Vice Rector – IULM University Milan Full Member of the Italian Management Society