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By Giuseppe Fonte, Gavin Jones and Alvise Armellini
ROME (Reuters) -Italy’s tax system is skewed in a way that lets society’s wealthiest 7% pay proportionately less tax than low and middle-income earners, a new study shows, fuelling inequality and hurting public finances in one of Europe’s most indebted nations.
In advanced countries, the rich, helped by financial advisers and low levies on investments, find ways to maximise returns on capital and reduce their tax bills, and the top 1-2% often pay proportionally less than those below them.
But in Italy the distortions kick in much earlier on the income and wealth scale, according to the study by five economists including former Treasury official Alessandro Santoro.
The paper, which has triggered a debate in the euro zone’s third-largest economy, shows the system is regressive not just for the top 1-2% but for the top 7%, involving medium-high salaries as well as the super-rich.
Progressive taxation means the more you have the more you pay as a proportion of your earnings and assets. The system becomes regressive when this principle is reversed.
“There is evidence that regressivity in Italy is remarkable compared with similar economies and affects incomes above 76,000 euros ($80,000) with wealth of about 450,000 euros,” Santoro told Reuters.
REDUCING INEQUALITY, DEBT
This situation has major consequences for Italy’s broader economy, many economists say.
They say hiking taxation on medium-high and high earners would reduce inequality in a country where poverty has been rising for years and would enable Rome to cut the euro zone’s second-biggest debt pile.
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 currency bloc’s most chronically sluggish economy.
A Treasury spokesperson said the government was against raising taxes and pointed to tax cuts for lower and middle earners in Rome’s 2025 budget.
Italy is a relatively high-tax country, with levies of all types amounting to 41.5% of gross domestic product. But the burden is unevenly spread.
The country has low taxation on some property and financial assets that are typical sources of income for the wealthy, favourable rates for the self-employed, and negligible inheritance tax.
Meanwhile, low paid workers in Italy lose more of their gross wages to tax and social security contributions than in any other EU country, European Commission data shows.
“We have chosen an extremist mix of tax rates,” said Marco Leonardi, economics professor at Milan’s Statale University and a former aide to Prime Minister Giorgia Meloni’s predecessor Mario Draghi.