Italy outlines contested tax reform plan to unions

Italy on Tuesday will present to trade unions a bill to reduce current income tax bands from four to three within two years; a move that critics say will mainly benefit the wealthiest.

Prime Minister Giorgia Meloni's government intends to overhaul the fiscal system with the aim of achieving a single tax rate before national elections scheduled in 2027, according to government officials and a draft seen by Reuters.

It also wants to offer incentives for companies to invest and hire employees.

Economy Minister Giancarlo Giorgetti, his deputy Maurizio Leo and Cabinet Undersecretary Alfredo Mantovano will meet union representatives at 1300 GMT to present the bill.

Rome is considering setting the three bands at 23%, 33% and 43% in the short term, the officials said, adding that a more expensive solution being studied would lower the second band to 27%.

The current income tax levy, named IRPEF, is based on rates running from a minimum of 23% on annual income up to 15,000 euros, to a top rate of 43% on income above 50,000 euros.

To avoid straining state coffers, the Treasury plans to partly fund the bill by reducing and simplifying the current 600 ways in which people and firms can deduct various types of spending from their tax bill.

These so-called "tax expenditures" deprive the state of 165 billion euros ($176.35 billion) in revenues every year, a document showed.

Alessandro Santoro, finance professor and a former Treasury official, who helped draft parts of Rome's post-COVID Recovery Plan under Meloni's predecessor Mario Draghi, downplayed the positive effects claimed by proponents of the flat tax model.

"The incentive effects on employment and investment theoretically linked to the reduction of income tax have rarely materialized, and have in any case been less than the negative impact on revenue of the lower rates," he told Reuters.

"A flat tax model tends to decrease revenues and favor the wealthiest, amid inflationary pressures that weigh on the poor," Santoro added.

Under the fiscal reform, the current corporate income tax rate of 24% would be split into two by introducing a second lower band at 15% to reward entrepreneurs who create jobs and invest in innovation to boost productivity.

"The more they hire and invest, the less they pay," the Treasury document said.

The bill also sets out a cooperative approach to try to curb Italy's chronic problem of tax evasion, which cost the state some 90 billion euros in 2020, according to the most recent Treasury data.

Rome offers small firms and the self-employed the chance to agree in advance how much they should pay to the state in taxes over the coming two years, without fear of inspections.