BNA: Defense Need Will Not End Tax Cuts,Italian Prime Minister Promises

This article originally appeared in

No. 184
Tuesday, September 25, 2001 Page G-1
ISSN 1522-8800

ax, 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Though the exact nature of the tax cuts will not be published until the official budget is unveiled late in 2001,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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