All this talk of a flat tax

The current political environment in Italy is one which I find very interesting, notably in how it is perceived in foreign media and presented to us through the usual media outlets.  In, I reference the constant use of the word 'Populism' and 'Populist Government'. I confess that I had to have a quick look at the definition of populism before writing this blog and was interested in finding out that the exact definition, according to Wikipedia, is:  'Populism is a political philosophy supporting the rights and power of the people in their struggle against a privileged elite'   I have a confession to make that if I can pick and choose only this broad definition of Populism then I think I can fit myself into a part of the populist ideal. (Clearly it is more complicated than this, but I am merely trying to make my point, and as a regular reader of my blogs's you will understand my usual approach!) However, I think it is worth exploring the idea that the Lega and M5S coalition have put together of a flat tax. Although a flat tax for everyone, no matter how rich or poor is completely obscene in my opinion the 'flat tax', proposals, which will launch at 20% for businesses as of July 1st 2018 and 15% - 20% on 1st Jan 2019 for individuals, assuming the Government holds together, actually make a lot of sense to me.   A radical reform of the Italian income tax system is about to take place, and one which is long overdue in my opinion. Not for any populist reasons, but for more practical reasons which I will expand on below.   The proposed flat tax regime If you want to have a look at the Contratto per il Governo di Cambiamento, then you can do so HERE. It makes interesting reading, if not full of more blurb than actual facts at this stage. However, it’s a start.  So, going back to the issue of the flat tax. The proposal, soon to be put into force, is to reform the tax regime into 2 flat tax rates, namely 15% and 20%. This sounds very new and certainly will win a lot of those populist votes.  But first let's take a look at how income is currently spread in Italy and the following chart shows just who it would affect:  It's quite interesting to note from this chart that 80% of the tax paying population of Italy earn up to €29000. The median declared income is €19000pa. Those may sound strange numbers but when you consider the current Italian tax rates (see chart below), you can start to form an idea that there is probably a little bit of fiddling of the figures.   After €28000pa in reddito complessivo the tax rate jumps from 27% to 38%.  With this in mind, the proposal of a flat tax could potentially bring in alot of, currently, undisclosed (let's call it what it really is: 'in nero') money to the Government coffers.

A QUICK REMINDER OF ITALIAN INCOME TAX RATES (IRPEF - Imposte sul reddito delle persona)                              €0 - €15000                23%             €15000- €28000         27%  (€3450 + 27% on the part over €15000)            €28000 - €55000        38%  (€6960 + 38% on the part over €28000)              €55000 - €75000        41%  (€17220 + 41% on the part over €55000)       over €75000               43%  (€25420 + 43% on the over €75000)

How might it work in practice?  The new proposal is to have a flat tax of 15% on a combined 'reddito famigliare' of up to €80,000pa. If your 'reddito famigliare'  is above €80,000pa then the flat tax rises to 20%.  A proposed maximum tax of €3000 would apply for every member of the family where they have an individual 'redditto complessivo' of no more than €35000pa.  This would be limited to families where the 'redditto famigliare' is between €35,000-€50,000 pa.   In short, the most generous tax deductions are for those who have a 'redditto famigliare' between €40000 and €60000pa.  A straniero example... This all sounds very exciting and somewhat overly generous for a country which has historically taxed its citizens up to the eyeballs. However, let's use an average straniero example to see what difference it would make.  Let's assume that we have a retired couple, with state pensions (€8000pa each) and private pensions of €18000 and €3000 respectively. They also own a property in their home country which generates a UK income of €8000pa (jointly owned). They have investments and savings, but for the purposes of this example they are not relevant as the proposed measures are for income tax only.  Under the current regime the income of each individual would be subject to taxation.  Spouse 1:  €8000 + €3000 + €4000 = Total €15000pa      The tax rate applicable would be 23% therefore the tax would be €3450 For the purposes of this example I am not including any benefits, or credits that might be available to any one individual or another Spouse 2:  €8000 + €18000 + €4000 = €30000pa    Spouse 2 exceeds both band 1 and 2 and will enter the higher rate tax bracket creating a taxable liability of €7720 THE TOTAL INCOME TAX BILL WOULD BE: €11170 per annum Under the new proposals both spouse 1 and spouse 2 would pay a flat tax of 15% on their combined income, meaning a total tax bill of €6750 A SAVING OF €4420pa Let's take a breath and calm down for a moment So, before we all start getting very excited we all know the Italian Government is not the most coherent at the best of times and we are in an unprecedented era. It may be that this proposal is watered down yet and we get a half-way house offer, but I expect that simplification and lower tax rates are on the cards. In the end the country still has to balance the books and attract foreign investment. If they don't have enough money coming into the Government coffers to keep the system running smoothly (for lack of a better word) then the money will soon dry up and punitive tax rates will have to be imposed to reap that which has been lost.