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Why Italy’s Substitutive Tax Won’t Help the Poor

Naples, Italy

Roar writer Violeta Fernandez Dieguez on the newly introduced substitutive tax reform in Italy and why it should be rejected by the Italian people and government.

Italy, the home of art, history – and now many more millionaires. Introduced in 2017, a new “substitutive tax” allows anyone with the means to pay a flat rate of €100,000 a year in lieu of regular taxation. The vast majority of Italians, on the other hand, pay a progressive tax rate of up to 43%. The government’s plan is to lure high-spenders into their coasts and Italian shops, augmenting spending. This tax reform will remain in effect for at least fifteen years.

Another attractive aspect of this tax bill is that its benefits can be extended to an applicant’s family members for an extra €25,000 per person annually. This is not a new concept; Jersey, the Isle of Man, and Switzerland have similar tax bills designed to captivate the rich; and, at first gance, it seems to be working. The Italian government reported 350 to 400 applicants to this “substitutive” tax plan from all across the UK, Russia, the US, and Asia. To apply for it, one must only spend at least six months living in Italy.

Another reason this plan was put forward is tax culture. The International Monetary Fund estimates that tax avoidance costs the world’s governments around 500 billion pounds a year. Italians would rather lend the government money in the form of bonds than pay their taxes. With plans like this, the richest wouldn’t be as inclined to divert their assets into illegal territory since they are already getting a “good deal”.

Though it makes sense to want the richest of the rich to spend their incomes in your territory, this plan may not be the best idea. Matteo Renzi’s centre-left party introduced this bill to bring high-spenders and their consumption to Italy – but the government shouldn’t be bargaining with the elites. Instead of trying to bring in more wealth, it should focus on redistributing the wealth that is already there.

The government that put this extension forward is an unexpected one. The Lega Nord and M5S coalition has aimed for new economic reforms such as raising pensions and introducing a basic income. These don’t seem to be in line with the substitution tax, which benefits the rich directly. Nevertheless, the change to the tax regime seems to be an attempt to help the poorest parts in Italy, since the southern regions are the least well off. In Naples, slums and mansions share the same coast. Italy has one of the highest at-risk poverty rates at around 20%, beating Europe’s 16.8% – and the poorest live in the cities the government wants the rich to move to.

Apart from the regional wealth disparity in Italy, there is a high disparity between the country’s richest and poorest citizens. 85% of the wealth in Italy is held by the wealthiest 40%, while the richest 14 individuals hold by what is owned by the poorest 30%. This disparity is growing every year, and now, with the Covid-19 recession, it will do so at a quicker pace. This is an indicator of why the substitutive tax reform won’t fix the problem it is in place to solve. If its aim was to promote consumption in poor regions, it has failed – the wealth hasn’t reached the bottom part of the population.

The impact this could have on the whole of the Italian population cannot be understated. This plan may well be a success – if the money spent trickles down and reaches the lowest classes, that is. As it stands, the plan is not as feasible as it might seem.

Greece introduced a similar plan where anyone who invested 500,000€ in Greek assets could also apply for a €100,000 flat tax. If Greece is any example, plans for trickle-down economics are more utopian than they are innovative. Just to put in perspective, Greece’s GDP per capita is 72% the average of the Eurozone’s, their debt is more than 180% their GDP (the Eurozone average is almost 88% and their overall satisfaction rates are much lower than those of other Eurozone countries.

The plan seems to be putting money in places where there isn’t any, but reality is much more complex than that. There is no concrete evidence that trickle-down economics works. And, even so, there are no actual measures in place to ensure beneficiaries of the tax reform actually pour their money into Italian companies. They may only buy from companies that pay taxes in other countries or work around the system to make exclusive use of the substitutive tax. This tax is questionably profitable for the government, and it should be rejected by and for the Italian people.

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