Italy: Monti announces surprise reduction in income tax
October 10, 2012
On 10 October, the current technocrat administration of Prime Minister Mario Monti presented the budget for 2013. To the surprise of most analysts, the government plans to reduce the income tax for low-income earners. Despite the tax cut, the budget draft envisages a total downward adjustment of EUR 11.6 billion, to be reached through spending cuts and increased revenues from a hike in the value added tax (VAT). With the budget bill, the government aims to meet its target of a balanced structural budget by 2013, while at the same time easing the effects of the austerity measures that the Monti administration has enforced since taking office in November last year. From 2013, income tax will be lowered to 22% from 23% for incomes up to EUR 15,000, and to 26% from 27% for earnings between EUR 15,001 and EUR 28,000. Tax rates remain unchanged for the top three brackets. According to the government, the tax cut will be financed partially by savings amounting to EUR 3.5 billion through more efficient spending in the public health system and by further cuts in the funding of local administrations. The government expects to obtain additional resources from a one percentage point increase in VAT effective from June 2013 (down from a previously planned two percentage-point hike) and from the introduction of a financial transaction tax. However, it is still unclear whether the combined effect of the tax cut and the VAT increase will result in a higher household tax burden. The draft budget now awaits parliamentary approval, although consultations among the political factions supporting the Monti administration may result in amendments. The proposed measures have, nonetheless, been criticized by most political forces - which are seeking to cash in on the Italian public's rising anti-austerity sentiment six months ahead of elections in April 2013 - and by the trade unions, which have announced a general strike for 24 November.
Author: Armando Ciccarelli, Head of Data Solutions