The OECD Economic Survey of Italy released on 19 February 2015 notes that Italy is undertaking ambitious reforms to increase economic growth. In the past reform projects have not reached full implementation but this time Italy is reforming the political and institutional framework to clear away obstacles to the implementation of the reforms.
The main challenges for Italy are to make the economy more productive and competitive and this requires labor market reforms and more competition. Restrained government expenditure and tax increases have improved the fiscal position and if Italy achieves more growth and low interest rates the debt burden will be reduced. The OECD urges Italy to adhere to the planned fiscal strategy which will bring down the ratio of debt to GDP.
The OECD points out that the Italian tax system has too many exemptions and reduced tax rates. Reducing the number of these exemptions would effectively broaden the tax base and this would permit the tax authorities to collect the same tax revenue with lower overall tax rates. In 2011 Italy’s Finance Ministry identified 720 individual exemptions or reduced tax rates many of which are necessary to ensure that the tax system is fair, but a number are not necessary for fairness and are causing losses of tax revenue for the government. The 2015 budget is scrapping seven of these tax reliefs, but at the same time it is introducing some new relief.
Italy has so far taken no action to reduce the number of exemptions and lower rates of value added tax (VAT) but this tax is the one that needs the most reform. The OECD estimates that the reduced rates and exemptions in the VAT system lead to revenue losses that are twice as high as in other EU countries. There are also losses from taxpayers who do not comply with the VAT law.
The stated reason for many of the VAT exemptions and reduced rates is to protect low income groups, but this type of help could be better targeted through spending measures. The reduced rates and exemptions benefit both high and low income groups and are therefore not well targeted, especially as the higher income groups spend more on the relevant goods and therefore benefit far more in aggregate from these VAT concessions than low income groups. A case by case examination of these VAT reliefs should be carried out and the annual survey of tax expenditures should identify the relief that can be removed. This could be combined with the planned revision of Italy’s system of social support so that the tax expenditures are removed while targeted social support is increased.
One of the key recommendations made by the OECD is to continue the efforts to reduce tax evasion by means of effectively enforcing tax compliance and simplifying the tax collection procedures. This would be done at the same time as broadening the tax base, eliminating unnecessary tax exemptions and simplifying the tax system generally.
Other recommendations made by the OECD in the survey are to make taxation more environmentally friendly by reducing the current gap between the amount of duty charged on diesel and petrol. Also the tax burden could be shifted from electricity to the energy products used in generating electric power and the rates of duty could be determined so that they take into account the carbon emissions and other pollutants related to each type of fuel.
