As Italy's plans for flat tax gain steam

2019-06-03 23:14

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by Eric J. Lyman

ROME, June 3 (Xinhua) -- The head of Italy's largest political party says a plan to introduce a flat tax will be the government's top priority going forward, even if he has to make the government collapse to make it happen.

Matteo Salvini is Italy's deputy prime minister and head of the League, the nationalist political party which was the top vote getter in Italy in the recent election for members of the new European Parliament.

The League's strong showing in the latest vote has tilted the balance of power in its direction, after it earned almost double the votes of the populist Five-Star Movement, the League's coalition partner.

During the first year of the government of Prime Minister Giuseppe Conte, Salvini made the closure of Italian ports to would-be asylum seekers his central issue. Now, Salvini says it will be tax reform: charging income tax to a flat 15-percent on all income.

Salvini has brushed aside speculation that he wants to form a government without the Five-Star Movement, though he has said that if the Five-Star Movement does not back the flat-tax plan he would consider pulling support from the government, making it collapse. The Five-Star Movement, which had previously opposed a flat-tax, now says it is willing to consider the measure.

The proposal comes at a time when Italy is facing the possibility of sanctions from the European Commission over the size of the government's budget deficit. Economists estimate the flat tax would reduce government revenue by as much as 30 billion euros (33.6 billion U.S. dollars), exacerbating the deficit issue.

Economists say switching to a flat tax could do more harm than good for Italy.

"Italy needs tax reform," Francesco Tundo, a tax law professor at the University of Bologna, told Xinhua. "Taxes are too high, the tax system is too complex with tens of thousands of tax rules, and there is too much tax evasion. The flat tax will surely make the tax system simpler, but it won't help tax evasion and it won't lower taxes in a responsible way."

Criticisms of the flat tax programs is that the disproportionately hurts self-employed workers, and gives more savings to higher income earners who earn money from investments.

"Every few years, people talk about the flat tax, but it is ultimately unfair," Francesco Armillei, an economist with Tortuga, a think tank, said in an interview. "There are estimates that half of the savings under this plan would go to the wealthiest ten percent of tax payers."

Tundo said that passing the flat tax would almost assure Italy would have to raise the value-added tax, a sales tax that covers most purchases. The plan to raise the value-added tax from its current level of 22 percent to 24 percent is an unpopular one, in part because it has a disproportionate impact on lower-income workers who spend a larger percentage of their income on purchases.

The government is counting on strong economic growth to help it avoid raising the value-added tax. But Italy's economy contracted over the second half of last year and grew a meager 0.2 percent in the first quarter of 2019.

The consensus estimate is that the Italian economy will grow no more than 0.3 percent for 2019 as whole, with some estimates predicting a slight economic contraction for the full year.
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