Analysis

Italy Shows Goodwill to EU with Last-Minute Tax Changes

The right-wing government needs the EU to sign off on COVID-19 recovery funds.

Siena Italy bartender
Bartender in Siena, Italy, August 5, 2020 (Unsplash/Gabriella Clare Marino)

Italy’s new right-wing government has backed away from a plan to let shops refuse card payments under €60.

The country’s previous government, led by former European Central Bank chief Mario Draghi, required companies to accept all card payments in an attempt to fight tax evasion. Businesses that refused were fined €30 per transaction plus 4 percent of the amount.

The policy was one of the EU’s conditions for releasing COVID-19 recovery funds, of which Italy is the largest recipient.

Draghi’s policy is popular

Before the pandemic, Italians paid 82 percent of their transactions in cash. Tax agents estimated that a third of cash payments were undeclared. Businesses avoided paying €26 billion in sales tax. Istat, the country’s statistics institute, put the size of the black economy at €175 billion, or 10 percent of GDP.

After Draghi banned stores from refusing credit and debit cards, their use went up 11 percent, according to the Innovative Payments Observatory. The research group, based in Milan, also found that eight in ten card payments were under €60.

The large-business association Confindustria supported Draghi’s policy, but independent retailers, who tend to vote conservative, protested. The right-wing Brothers of Italy, League and Forza Italia won the election in September on a promise to revoke the card requirement.

Ruling parties keep other promises

The parties are keeping their promise to raise the limit on cash payments from €2,000 to €5,000. Draghi had meant to lower it to €1,000.

They will also still lower fines for Italians who cheated on their taxes. Companies will get a break from social charges if they hire women, Italians under the age of 36 and those currently on a “citizens’ income”.

40 percent of Italian women are in work, the lowest female labor force participation rate in the EU. Italian men are twice as likely to start a business.

Italy’s youth unemployment rate of 23 percent is the highest in the EU.

The citizens’ income is a jobseekers’ allowance introduced by the populist-left Five Star Movement in the government before Draghi’s. The right had vowed to abolish it. That has been postponed to next year.

Young parents will benefit from lower sales taxes on childcare products, an increase in the child allowance and a subsidy for young couples who buy their first home. The Brothers of Italy had campaigned on pro-family policies.

Deficit set to grow

The 2023 budget includes €35 billion in additional spending to help Italians pay their energy and grocery bills, producing a deficit of 4.5 percent of GDP. The EU treaty limit is 3 percent.

In a bid to show goodwill to the European Commission, which must approve Italy’s spending plans, the coalition also plans to:

  • Extend the 15-percent “flat tax” on self-employed earnings from €65,000 to €85,000 instead of the €100,000 they had campaigned for;
  • Limit the indexation of pensions to inflation; and
  • Raise the tax on windfall profits of energy companies from 25 to 35 percent.

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