Italy: fiscal improvements, but lots to do on making it a good place to do business

However,  effective this year, new anti-avoidance measures coupled with a new ‘fanatic’ enforcement mentality (which has emptied Italian ski resorts of high end skiers, and ports of super yachts—both types cautiously moving to Switzerland and France, respectively) the time tested pragmatic approach of over taxing knowing that taxpayers will under report, is not working anymore. To adjust, the government will need to aggressively cut taxes to avoid a huge crowding out effect generated by the fiscal tightening, which has increased both the taxable base and some of the actual headline rates. For example, IRAP, the tax that is effectively levied on turnover rather than profits was a temporary measure to circumvent business owners that always reported low incomes or losses. This tax, whose constitutionality and fairness was repeatedly challenged, has been marginally reduced by the government at the end of last year, but it must be scrapped entirely as a first measure to reconcile headline taxes with the need to provide oxygen for growth to the economy.

In addition, the government has promised a lot in terms of liberalising the economy, but to date, apart from the famous war with the taxi drivers, has accomplished quite little. The real test will come with labour market reforms, a very hot subject in Italy. Italian experts in this field are forced to live under police escort, given that their most prominent colleagues have been threatened, shot, and even killed. Italy’s labour laws famously defend only the employed at the expense of the young and the unemployed in general. Unless Italy gathers the force and the courage to make the country a better place to do business where you don’t have to pay taxes on losses, and are not afraid to hire because employees become a catholic marriage partner, no fiscal tightening will help to lower Italy’s high ratio of government debt to GDP which is still hovering well above 100%.