The leader of Italy’s far right Lega Nord has described the potential coalition with the populist five star movement (M5S) as a ‘bomb’ for Italy’s political establishment. It certainly will be a bomb for tax justice, Italy’s public services and economic and social equality in Italy.
Two of the main economic policies being proposed by the two sides of this deal are a universal basic income (UBI) from M5S and a flat tax of 20% from the Lega. Italy’s top rate of income tax is 43% today, and it has a 24% corporation tax with an additional local tax of around 3-5%.
There is every indication that if the coalition manages to get off the ground (and that is still a significant if), then the government will attempt to implement both policies. As a package this would be a disaster for Italy, with the M5S seemingly prepared to trade a small and limited UBI for a tax policy that will promote vast economic inequality and threaten to destroy the country’s public finances.
The flat tax
Many who promote flat taxes argue that they are a win-win. Citizens pay lower tax rates, but the simplicity of the system makes avoidance and evasion more difficult and taxes easier to collect. This, together with an economic boost generated by the policy makes up for any losses in income from the lowering of tax rates, they argue.
However, years of experience with flat taxes in eastern Europe tells us that this is a con. Tax cuts on corporations and the wealthy inevitably lead to less taxes collected from corporations and the wealthy. If government spending is to be maintained, that revenue needs to come from somewhere. In eastern Europe, those revenues come from higher taxes on consumption, like VAT, or higher taxes on labour, such as though social security contributions.
What we end up with, is a regressive tax system, redistributing wealth upwards, from the poor to the rich.
This is no doubt why Latvia, one of the first countries to adopt a flat tax in 1995, is now abandoning the policy and introducing a system of progressive taxation.
Initial analysis of the proposals being considered by the M5S-Lega Nord coalition demonstrate that what we know about the real world experience of flat taxes in eastern Europe is true in Italy – in spades.
The benefits would accrue overwhelmingly to the rich, and the poor could end up paying even more in taxes through the loss of tax rebates that the flat tax would entail. An analysis by Italy’s Il Sole 24 Ore shows how a three person family with a child over 3 years of age, with single earner bringing home 15,000 Euro or less a year, would see a staggering 127% increase in their tax bill. The same family on 100,000 would see a tax cut of 45%.
The Lega Nord have said there would be safeguards in their flat tax to prevent people facing tax rises, but these have not been detailed. Even if lower income families in the end are no worse off than before, the distributional impacts are clear. Single earners earning 15,000 Euro or less would see a tax cut of 5%, or an extra 85 Euro a year non a 20% tax rate. Those on 100,000 Euro would get an extra 16,000 Euro in their pocket. There are more than 18m tax payers in Italy, 45% of the total, who declare a yearly income of 15,000 Euro or less.
Estimates of the cost to government revenues of the flat proposals are between 50-80bn Euro. In addition, the M5S universal basic income would cost an additional 17bn Euro.
Where will the money come from? To generate an extra 100bn Euro in tax receipts from VAT rates would have to double.
A VAT rate of 40%+ is of course out of the question, and in any event both parties opposed to any rise in VAT. For now, the coalition appears to be indulging the fantasy that someone else will pay for their policies. A leaked copy of the draft coalition agreement between Lega Nord and the M5S includes the idea of asking the EU to forgive 250bn Euro in debt, and asking for a EU contribution to their universal basic income policy. I think we all know what the answer to that will be.
The reality is that these tax giveaways to the rich will need to be funded by massive cuts to public services, social welfare cuts and selling off public assets. Again, all hugely regressive policies which are likely to hit the poor even further.
The leader of the M5S has said that any coalition deal will be put to an online vote of the movement’s members. Lets hope for everyone’s sake that they reject any deal which threatens to put a bomb under the Italian economy.
Picture Credit – Palazzo Montecitorio by Simone Ramella on Flickr, used under the Creative Commons License