Italy confirms tax cuts

Following a Cabinet meeting on April 8, 2014, the Italian Government has issued a three-year Economic and Financial Document (DEF), which includes Premier Matteo Renzi’s pledge to pass both individual and corporate income tax cuts.

The tax reductions are to be provided, not only as a first decrease in Italy’s high tax burdens, but also as a means of provoking a boost to the country’s economy. In addition, it was emphasized that the measures are to be fully funded, either by public spending decreases or by other sources of revenue, and that the Government will therefore still deliver on its deficit-reduction commitment to the European Commission.

The individual income tax cuts will target lower earners. From May 1 this year, resources totalling EUR 6.7bn (USD9.3bn), or EUR 10bn on an annual basis, have been allocated by the Government to allow for an increase in individual income tax (IRPEF) deductions for employees earning less than EUR 25,000.

This would add about EUR 1,000 annually to the wage packets of some ten million taxpayers, and would be funded primarily through cuts to government spending.

In the DEF, the Government also emphasized its intention “to reduce business taxation, in a substantial manner, as soon as the resources are available.” As an initial signal of that intention, it was confirmed that there would be a reduction of at least ten percent in the regional tax on production (IRAP), to be financed by a hike in the rate of tax payable on financial income, from 20 percent to 26 percent from July 1, 2014. The tax rate on government debt and pension funds will remain at 12.5 percent.

It is expected that the increased IRPEF deductions, for those on lower incomes, will boost consumer demand and increase economic growth in the short-term, while the decrease in IRAP will have the effect of providing more employment in the medium-term.

The Government has confirmed that final details of the tax package for this year will be contained in a decree, which is expected to be issued by the Government on April 18.