This article originally appeared in
No. 194
Thursday, October 5, 2000  
                                                                Page G-1
ISSN 1522-8800
    Tax, Budget & Accounting

International Taxes
Italian Cabinet Approves Budget
Including $12.7 Billion in Tax Cuts

    ROME--Italy's Cabinet ministers approved a proposed budget that includes a combined 28 trillion lire (around
    $12.6 billion) in tax rebates and reductions, including a 1 percentage point decrease in a key corporate tax rate.

    The budget was presented to lawmakers Sept. 29, a day before the final deadline. Details were made available
    to the public on Oct. 2.

    Italy's Parliament and Senate must approve some version of the budget by year's end. Although they have the
    right to substantially alter Prime Minister Giuliano Amato's proposal, in recent years, the final budget has proved
    to be substantially similar to the proposed budget.

    The most important proposed tax reduction for corporations is in the key national corporate income tax (IRPEC).
    The proposed budget lowers the variable IRPEC rate by 1 percentage point in 2001, and by a further 1
    percentage point in 2003. The cut next year is estimated to be worth 8.9 trillion lire ($4.0 billion). The current
    median IRPEC rate is 37 percent of profits.

    Finance Minister Ottaviano Del Turco said in an August television interview that the tax cuts under consideration
    would include a "drastic" reduction in the key regional tax on productive activities (IRAP) (183 DTR G-2, 9/20/00).
    The budget submitted to lawmakers, however, does not directly address IRAP.

    "The ministers were looking for a way to spur growth on the supply side," Gilberto Parlamat, a budget expert at
    the University of Rome, told BNA Oct. 4. "Obviously, they decided a reduction in the IRPEC would be more
    beneficial than a reduction in the IRAP."

    Specific Effects Unknown

    Parlamat said it would be difficult to gauge the impact of the IRPEC reductions on specific sectors without more
    detailed information. He did speculate, however, that the IRPEC reductions were more likely to help large
    businesses, including multinationals, than cuts in the IRAP, which generally affects small and medium-sized
    Smaller tax changes that would affect corporations include a reduction on corporate fuel taxes worth 1.3 trillion
    lire ($587 million) and a 529 billion lire package ($239 million) to compensate businesses and individuals for
    unusually high energy costs this year.

    The budget also calls for a 15 trillion lire ($6.8 billion) cut in income taxes and the abolition of a tax on principal
    residences. It also allots an additional 1.4 trillion lire (around $632 million) to the country's pension system.

    Italy has the option of making tax cuts because of a booming economy and steadily strengthening enforcement.
    According to government figures released in July, tax revenues rose a seasonally adjusted 5.1 percent in the
    first half of 2000 compared to the same period a year ago. The year-on-year rise was 21.3 percent in
    nonadjusted terms. Similar rises are expected for the second half of the year.

    The proposed cuts are part of a larger plan--announced in early September--to lower taxes by 45 trillion lire to
    50 trillion lire ($20.3 billion and $22.6 billion) over five years (179 DTR G-1, 9/14/00).

    "In an international economic context of strong recovery, the forecasts for growth in our country are very
    favorable," the government said in a statement released with the budget.

    Political Influences Seen

    Although Amato's coalition hopes the budget will give it a political boost heading into parliamentary elections
    next year, it has so far drawn mixed reviews. Two of Italy's three largest labor unions--CGIL and UIL--told BNA
    they were happy with the proposed budget. But CISL, the third, was more critical, saying it did not do enough to
    reduce the tax burden for middle class workers.

    Meanwhile, Confindustria, Italy's industrialists' union and business lobby, criticized the proposed budget. A
    spokesman said it was "aimed at boosting short-term consumer spending through one-time tax rebates to
    families," something that "divides resources and risks weakening efficiency."

    The spokesman told BNA Oct. 4 that the group hoped the government would act to lower product costs by
    lowering the corporate tax burden more substantially.

    Confindustria, however, did applaud the ministers for including reductions that "are a first step, even if a partial
    one, to the reduction of excessive fiscal, social, and energy costs that are a serious drag on the
    competitiveness of Italian companies compared to their counterparts in other European countries."

    Debt Paydown Emphasized

    Some economists said the cuts should have been smaller, with the extra funds used to pay down the country's
    mushrooming debt, the second highest in the European Union in terms of gross domestic product.
    "Because of political pressures, something like debt reduction couldn't really be considered," Parlamat said.
    "It's not flashy, but, in the end, it's something that may come back to haunt the government. If they don't pay
    down the debt when there's a surplus, when will they pay it down?"

    According to information released by Italy's central bank, the Bank of Italy, the country's tax bill burden rose by 4
    percentage points in the past 10 years to a peak of 44.6 percent of gross domestic product in 1997, compared
    to a European Union average of 42 percent that year. But smaller rebates this year reduced Italy's tax collections
    to an estimated 42.7 percent of GDP. The government statement released with the budget estimated that the
    figure would drop to under 42 percent in 2001 due to more tax cuts.

    EU offices in Rome, which earlier criticized reports of proposed cuts of 22 trillion lire ($9.9 billion) as being "not
    very ambitious," said it was too early to comment on the larger cuts reflected in the budget submitted Sept. 29.

    By Eric J. Lyman
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