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Prepared by Michael Keen.
The guiding principles of the reform, and some specific objectives, are set out in a legge delega (still not yet finally approved by parliament) giving the government power to reform the tax system along the lines it describes. A subsequent Ministry of Finance’s technical report on the legge delega provides somewhat more detail, especially on the expected revenue implications. The medium–term financial program published in July 2002 outlines the tax changes intended for 2003.
The focus is on those aspects of the package that are most fundamental to the overall tax system, so that several significant but relatively minor items—such as the introduction of a tonnage tax and a unified service tax—are not considered here. Some are discussed in Deidda and Grabbe (2002). Nor does this chapter discuss recent tax amnesty schemes, though the associated erosion of the credibility of tax policy may damage the credibility of the wider reform program.
See Petretto (undated), who indicates that Veneto and Marche actually set rates in excess of the maximum 1.4 points allowed.
Kindly provided by Paulo Bosi.
The abolition of the inheritance and gift tax by the new government will tend to reinforce this increase in inequality.
Denoting pretax income by Y and expenditure attracting credit by E, net income under the prereform system is T (Y)—C (Y,E), where C denotes the credit received. With a postreform tax schedule of τ and allowances of A, net income is τ(Y - A (Y,E)). Setting A (y,E) = τ-1 [T (y)-C (y,E)], net income is the same in both cases.
Confusingly, the terra “dual income tax” is used in two quite different senses: here it refers to there being two rates of corporate taxation; more usually (as in Section F) it refers to distinct tax treatment of capital and labor income along the lines of the Nordic model. The system described here would be better described as a “partial Allowance for Corporate Equity (ACE)”, an ACE being a system that entirely excludes the normal return on equity from tax.
By this is meant, here and elsewhere, the system as it existed at the election of the current government.
The system applied to banks and financial institutions only from 2000.
The notional return on equity was fixed annually by the Ministry of Economy on the basis of state and private bond returns plus a risk allowance of 3 percent. Latterly, it was 7 percent.
Brazil and Austria have similar schemes (with differences in the precise definition of the equity base on which an imputed return is allowed); between 1994 and 2000, Croatia took this approach to its logical conclusion and adopted a full–blown ACE.
Until 2001, there was a minimum average tax rate of 27 percent.
The uplift was 20 percent in 2000.
The grandfathering provisions are asymmetric: while the equity allowance is not increased by subsequent increases in equity it is reduced by subsequent reductions (associated, for example, with the repurchase of shares).
With a corporate tax of 36 percent, for instance, the credit was 56.25 percent (=0.36/(1-0.36)) of the dividends received,
The comparison is between 12.5 percent withholding and, on the other hand, additional personal tax at the rate Tp on the underlying gross dividend (1/(1 - 0.36) less the imputation credit of 0.36/(1 - 0.36), an amount of (Tp-0.36)/(l -0.36).
The benefit is denied, however, in respect of shares held for less than a year. Some such provision is standard, as a means of ensuring that those dealing in shares by way of trade do not escape tax on their capital gains.
With no credit for foreign taxes paid on the underlying income source.
Precise definitions (and hence properties) of the AECT vary: see the Appendix to Thakur and others (2002).
These calculations do not take account of the Visco and Tremonti incentives.
This is dictated by the use here of the calculations in European Commission (2001), which have the merit of being comparable across countries. Conceptually, inclusion of the IRAP in these calculation is not attractive: if it is to be included, so should national VATs.
Giannini estimates, for instance, that the MECT for equity financed investments will be 31.5 percent after the reform, but -30.7 percent for debt finance.
The tax treatment of dividends does not affect the incentive to retain earnings (so long as that treatment does not change over time): by retaining, a company avoids the dividend tax today, but must pay it in the future when it pays the dividends without which the firm would have no intrinsic value to shareholders. (On this (no longer very) “new” view of dividend taxes, see Auerbach, (2001).
Assuming all profits net of foreign tax to be distributed, tax paid under present arrangements (leaving aside any withholding tax) is Tf + Ti(0.4)(l-Tf), where Tr and Tj denote respectively the foreign and Italian tax rates; under consolidation, it simply TI The calculation assumes Ti = 0.33.
For companies, interest is taxable at ordinary rates and the withholding tax is creditable.
It is origin–based in the sense that exports are not relieved of the IRAP nor imports brought into it, and income–type in the sense that sense that an effective deduction is not given for the immediate full cost of an investment but only for depreciation. On this terminology, and alternative types of VAT, see Ebrill and others (2001).
For companies active in several regions, revenues are allocated with reference to the proportion of total labor costs incurred in each.
Japan implements a subtraction–based VAT at national level. In the United States, Michigan and New Hampshire have state–level VATs, but levied on an addition basis (that is, on the sum of wages and profits). While some countries (notably Germany) share the revenue from national VAT across the regions, no gives the regions discretion over rates or base of the kind enjoyed under the IRAP..
See Box 2 the Staff Report.
Income subjected to this reduced rate was however taken into account in determining the tax payable on the labor component of income.