Flat Tax For Italy?

A flat tax and radical fiscal restructuring would transform Italy's economy and encourage taxpayers to invest in their human capital

Italy’s next election takes place in early 2018. Opinion polls so far show an electorate evenly divided among three players: the centre-left Democratic Party (led by Matteo Renzi), the insurgent Five Stars Movement, and the old centre-right coalition led by former prime minister Silvio Berlusconi. In a long electoral campaign, many will promise a pot full of gold at the end of a rainbow heading to the return of deficit spending.

My think tank, Istituto Bruno Leoni, has proposed an ambitious flat tax reform, which has aroused considerable interest and been more widely debated than any previous think tank proposal in Italy. It is ambitious and implies a radical restructuring of the existing tax system which is long overdue.

The current income tax is purportedly progressive, with five tax brackets from 23 to 43 per cent. But the complexities of the system help those who have the skills to navigate it. The “progressive” nature of our taxation is by and large a myth. Of the 40 million Italians who pay income tax, one third have an annual income of less than €10,000; one third an annual income between €10,000 and €20,000; one third between €20,000 and €100,000. Only 1 per cent of taxpayers declare an income higher than €100,000.

Such an implausibly low percentage of higher-income taxpayers is too easily dismissed as solely due to tax evasion. The real problem is that the tax system discourages people from working more and investing in their human capital.

What we propose is a radical fiscal restructuring: a flat, 25 per cent tax rate on the major taxes in our system (personal income tax, corporation tax, VAT, tax on financial dividends), plus the repeal of local and regional taxes. We also propose to replace the current patchwork of benefits with a universal cash subsidy — a so-called “basic income” — graduated on a geographical basis, but subject to a number of conditions.

We would redesign the financing of a number of public services (particularly of healthcare), preserving the principle of these being free at the point of use, and shifting to the more affluent Italians the cost of the services they’re using, as well as granting them the possibility of opting out of social insurance.

Our proposal would decrease both the overall tax burden and the 50 per cent of GDP spent by the government. Once fully operative the reform would cut both figures by 4 per cent. It will require a spending review, aimed at achieving modest cuts initially of 0.6 per cent of GDP, rising eventually to 1.6 per cent. The full implementation of our proposed reform should be strictly conditional on this review.

Under such a scheme, Italy would become a “25 per cent country” in which the government’s share would amount to a quarter of the fruits of one’s labour. This is not a magic number, but it aims to encourage the idea that there ought to be a limit to how much tax the government can demand from us.

It is true that a flat tax has never been adopted in a major Western democracy. Taxation in contemporary democracies results from the interplay of interest groups. Reducing public spending — which usually means special privileges for particular groups — is not an easy task for politicians. And yet these privileges are to blame for Italy’s anaemic economic growth. Only a radical reform such as we propose will restore the necessary conditions for a dynamic economy.

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