Italy's tax system under scrutiny as study shows it favors the rich

Italy's tax system is unfair in a way that allows the richest 7% of society to pay proportionately less tax than people on low and middle incomes, a new study shows, fueling inequality and damaged public finances in one of Europe's most indebted nations.

In developed countries, the wealthy, aided by financial advisers and low investment taxes, find ways to maximize capital returns and lower their tax bills, and the richest 1-2% often pay proportionately more less than those below them.

But in Italy, these injustices and distortions in the tax system start much earlier at the level of income and wealth, according to the study by five economists, including former Treasury official Alessandro Santoro.

The study, which has sparked debate in the Eurozone's third-largest economy, shows the system is regressive not just for the richest 1-2%, but for the richest 7% of people, including average earners. high, as well as the ultra-rich.

Progressive taxation means that the more you have, the more you pay as a percentage of your earnings and assets. The system becomes regressive when this principle is reversed.

"There is evidence that the regression in Italy is exceptional compared to similar economies and affects incomes above 76,000 euros with assets of around 450,000 euros," Santoro said.

Reducing inequality and debt

This situation has major consequences for Italy's economy, say many economists. They say raising taxes on middle and high earners would reduce inequality in a country where poverty has been rising for years and enable the government to reduce debt levels. Italy is the second most indebted country in the Eurozone.

Alternatively, it could provide room to cut taxes for lower earners who spend proportionately more of their income than the rich, potentially helping consumption and growth in the eurozone's slower economy.

A Treasury spokesman said the government was opposed to tax increases and pointed to tax cuts for people on low and middle incomes in the 2025 budget. Italy is a relatively high-tax country, with taxes of all kinds , amounting to 41.5% of gross domestic product. But the burden is unevenly distributed.

The country has low taxation on some property and financial assets, which are typical sources of income for the wealthy, favorable rates for the self-employed and negligible inheritance tax. Meanwhile, low-wage workers in Italy lose more of their gross wages to taxes and social security contributions than in any other EU country, European Commission data shows.

Most financial investments are taxed between 12.5% ​​and 26%, rental property can be taxed at a flat rate of 21%, and there is no tax on first homes. The self-employed, a base of support for Mellon's right-wing government, can only pay 15% on annual income of up to €85,000, while the highest tax bracket of 43% for wage earners applies to income above €50,000 in year.

Fifty years ago, Italy's highest income tax rate, applied to top earners, was 72%.

The burden of the middle class

As a result of these distortions, people earning between €29,000 and €75,000 a year, who make up 21% of taxpayers, contribute more than 40% of income tax revenue, Treasury figures show.

Inheritance tax yields only 1 billion euros a year, compared with about 18 billion in France and 9 billion in Germany and Britain. The government, under pressure to ease the burden on the middle class, is scrambling to find €2.5 billion in its 2025 budget to cut taxes on those earning €50,000-€60,000.

Meloni has not indicated any intention to find money among Italy's upper class, although she recently doubled a contested "flat tax" on income earned abroad, which aims to attract millionaires to the country.

The government argues that flat taxes, or similar schemes such as the 15% flat rate for the self-employed, simplify the system and help reduce tax evasion. Santoro called for a tax on wealth owned by 1%, or even just 0.1%, that could yield up to 12 billion euros a year.

The first group reaches about 500,000 people, who own assets over 2 million euros, while the 0.1% of Italy's richest reaches 50,000 people with assets over 15 million euros. /   Monitor