This article originally appeared in
No. 184
Tuesday, September 25, 2001  
                                                             Page G-1
ISSN 1522-8800
    Tax, Budget & Accounting


International Taxes
Defense Need Will Not End Tax Cuts,
Italian Prime Minister Promises


    ROME--Despite promises to reach European Union deficit targets while increasing defense spending in the
    wake of the Sept. 11 terrorist attacks in the United States, Prime Minister Silvio Berlusconi has vowed that Italy
    will not raise recently reduced corporate and individual taxes.

    The pledge not to raise taxes came amid widespread speculation that Berlusconi's rhetoric about increasing
    defense spending while maintaining EU fiscal targets will force the government to back away from 2002 tax
    breaks promised earlier in the year. But Berlusconi, who has been in office since June, said that would not take
    place.

    A spokesman for the prime minister's office told BNA Sept. 21 that funding for the increased defense spending
    would come from cuts to other departments, though the spokesman did not elaborate. The government is yet to
    say how much it will increase defense spending or to detail how the extra funds will be used.

    "The details have not been finalized, but the target is to use existing funds in a different manner that will allow
    us to increase defense spending without having an impact on targets for deficit reduction and taxes," the
    spokesman said.

    Details of Tax Cuts Not Yet Revealed

    Vito Tanzi, an undersecretary at the Italian Treasury, appeared on television Sept. 22 to reiterate vows that Italy
    would continue work toward a previously stated government debt target of 0.8 percent of gross domestic
    product this year and 0.5 percent in 2002. However, he also took the opportunity to state that there were no
    plans to raise taxes because of the current uncertain world economic situation.
    Though the exact nature of the tax cuts will not be published until the official budget is unveiled late in 2001,
    Berlusconi and other members of his government have painted it in broad strokes.

    The major pillar of the tax break plan is an initiative to reward companies that reinvest profits with a deduction of
    up to 50 percent of the reinvested figure if it is above the average amount of reinvested profits for that company
    over the previous five years. That initiative, the so-called Tremonti Law named for economist and Finance
    Minister Giulio Tremonti, was first proposed when Berlusconi was prime minister seven years ago and was
    updated and proposed again in July.

    The new version is wider reaching than the 1994 version, which included a narrow definition of the word
    "reinvestment" and covered only certain industries. Instead, the new initiative covers virtually any business,
    including insurance companies, retailers, banks, and the self-employed, and regards any kind of research,
    training, infrastructure and development costs as allowable reinvestments.

    Incentives for Slowest Growing EU Economy

    The Tremonti Law is aimed at sparking growth. Government estimates in July showed that Italy's annual growth
    rate would rise 0.2 percent in 2002 and 0.3 percent in 2003 as a result of the incentives--a welcome trend in
    what is traditionally the EU's slowest growing economy. Critics, however, wonder if the government could be
    spreading its resources too thin.
    The tax relief that is part of the Tremonti Law is part of a broader $30 billion, 10-year tax break plan Berlusconi
    promised during his campaign. Berlusconi also promised to fund infrastructure projects worth some $5 billion,
    while paying down debt levels that are the second highest in the European Union in GDP terms. Add to that the
    increased defense spending Berlusconi has promised in the wake of the U.S. attacks, and many experts see a
    likely shortfall.

    "The government says it will increase spending and decrease taxes and they have not yet said where the
    money will come from," Francesco Caetani, a former Organization for Economic Cooperation and Development
    consultant, told BNA Sept. 24.

    Confindustria, Italy's leading employers' association and a strong advocate of the Tremonti Law and other parts
    of the tax reduction package, said it is taking the prime minister at his word when he says he will not raise taxes.

    "We have no reason to doubt the government's willingness to encourage growth by reducing the corporate tax
    burden," a spokesman told BNA on Sept. 21. "This is a key part of the government's strategy, and those who say
    it may be canceled are only speculating."



    By Eric J. Lyman
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