The Pros and Cons of a Flat Tax in Italy

A single tax rate could boost growth and discourage tax evasion, but there are downsides.

Italian prime minister Silvio Berlusconi arrives for a European Council meeting in Brussels, June 24, 2011
Italian prime minister Silvio Berlusconi arrives for a European Council meeting in Brussels, June 24, 2011 (European Council)

Center-right parties in Italy, led by former prime minister Silvio Berlusconi, are calling for a flat tax of 15 to 20 percent.

The single rate would replace the current five income tax brackets and possibly the two business taxes (national and regional).

Renato Brunetta, the leader of Berlusconi’s Forza Italia in the lower house of parliament, tells the Financial Times:

It’s the fiscal shock that will make Italy emerge from the trap it’s been in for the past decades.

Here are the pros and cons.

Pros

  • So long as the new rate is lower than 23 percent, it would cut taxes for everyone. 23 percent is the lowest of the five existing brackets. The top bracket, for incomes over €75,000, is 43 percent.
  • Introducing an income tax threshold — the parties are talking about €13,000 per year — would provide additional relief for low incomes.
  • The hope is that Italians would spend and invest more, boosting the economy.
  • A flat tax could help discourage tax evasion, which is pervasive. Tax fraud is estimated to equal a fifth of Italian GDP.

Cons

  • Berlusconi has campaigned for a flat tax since at least 1994, yet — despite being prime minister three times since then — he has never managed to make it happen.
  • Most of the gains would go to highest incomes and Italy already has one of the highest income inequality rates in Europe.
  • There would need to be significant spending cuts. The Bruno Leoni Institute, a libertarian think tank, has calculated that a 25-percent flat tax would lower revenue by €27 billion. A rate between 15 and 20 percent would require even deeper cuts and Italy does not have a great track record when it comes to reducing public spending.
  • With debt close to 160 percent of GDP — the highest rate in Europe — Italy can ill afford fiscal experiments.