A debate has started in Italy regarding tax reform. Every so often Italy has had its attempts at tax reform and the result (according to most Italians) is that they end up paying more tax, the tax regime becomes more complicated and everyone becomes more unhappy.

What triggered off the debate this time, was the position taken by two of the three major trade unions, CISL and UIL.

The claim by these unions was immediately taken up by the Lega Nord, the coalition partner of Silvio Berlusconi and the PDL. Soon the matter made its way into the parliamentary agenda.

The debate in Italy will be characterised by four aspects. First are ideological issues. Although there is general agreement that tax has to remain progressive, ideological issues divide politicians on what should be taxed.

The second aspect is the need to maintain the policy of fiscal consolidation. For this reason, any tax reform should not produce a negative effect on government revenues. S

ome political parties will not be bothered with this requirement, while others certainly will, and so this aspect will be a source of controversy.

The third aspect is the distribution of tax revenues across the whole country, in that the central and northern parts of the country should not continue carrying the more significant part of the tax burden.

The Lega Nord has been clamouring for the transformation of the Italian state onto a federal state, which would enable tax revenues collected from a region to be used within that region and not transferred to another region.

Undoubtedly, not all will be in favour of such a proposal.

The fourth aspect is the simplification of the Italian tax regime, which, today, is a reflection of various compromises that have been made over the decades.

In this regard there will be a great deal of mud slinging as to whose fault it is that the tax regime is so complicated.

One interesting consideration that is emerging is the distinction between tax on income earned from productive activities (what the Italians call reddito) and tax on unearned income such as rents or annuities (what the Italians call rendita). What seems to be unifying all political parties is that there should be a real tax reform and not just a review of current legislation.

All of this should be of big interest to us. Maybe the only aspect that is irrelevant to us is the geographical distribution of tax revenues. However, starting with the last point, it is important to highlight that over the years, we have had slight amendments to our tax regime with the raising of income tax ceilings and changes to tax bands.

This is certainly not tax reform. On occasions we have had some elements of reform such as the removal or intro-duction of capital gains tax changes in the succession duty payable.

However, we have not had a far reaching tax reform that our country may have come to need. The dramatic change in the structure of our economy requires this reform, as opposed to just a review.

Also of interest to us is the issue of the progressive nature of our tax regime. I mention it not because I know of anyone in this country who would prefer a regressive tax regime; but rather because we need to determine how progressive we wish our tax regime to be.

For example the highest rate of tax used to be 65 per cent some 25 years ago. Nowadays, it is 35 per cent. Should it remain so? Should it be higher? Should it be lower? Linked to this is the mix in government revenues between direct taxation, indirect taxation (VAT and excise duties), and revenues generated for services rendered by the public sector. I would expect an element of controversy on this matter.

This in turn would lead us to the simplification of our tax regime. Ours is fairly simple and fairly understandable. One cannot have a tax reform if one ends up creating a complicated system that will eventually be riddled with loopholes.

Equally important is the requirement that any tax reform should be neutral in terms of government revenue and expenditure, as we certainly cannot afford to increase our fiscal deficit. There should be no controversy in Malta on either of these two elements.

That would leave us with the issue of whether to tax earned income or whether to tax unearned income. In some respects, over the years we have moved away from taxing unearned income.

However, taxing earned income tends to penalise entrepreneurship and the willingness to work. One also appreciates the point that unearned income has tended to provide for the rainy day or as a top up for one’s pension.

So, whatever choice we will eventually make will have its negative and positive impacts. Maybe we should follow closely the debate in Italy on its tax reform as it could provide a great deal of the proverbial food for thought.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.