Flat Tax

News on the possible reform of the Flat Tax which could change the face of Italian taxation

by Federico Valenza

The flat tax continues to be a topic of political debate and work on tax reform for its extension continues. In reality, the contours still appear unclear but it has been mentioned since the beginning of the legislature as an objective to be achieved within the project to review the tax system and to be implemented gradually.

Flat tax within the legislature

Maurizio Leo, deputy minister of Economy, declared, in an interview with the newspaper La Stampa on May 30, that "there is a project, shared by all the political forces that won the elections, which aims toreduce the tax burden".  The deputy minister states that the flat tax will arrive by the end of the legislature, while the first step is scheduled for next year with the reduction of Irpef rates and the cutting of the tax wedge. 

As reported by Sole24Ore, the flat tax is currently used by around 2 million professionals, self-employed workers and entrepreneurs who join the flat-rate regime of VAT numbers, causing lost revenue in public accounts for a total amount of 3.5 billion. As illustrated in our previous article on the topic, the Italian legal system already has other flat taxes which show a fiscal erosion of around 4.8% for 2022.

Over the years, in fact, the replacement tax regimes have gradually increased, undermining, according to the Court of Auditors, the principle of all-inclusiveness of the tax base envisaged by article 51 of the Consolidated Law on Income Taxes (TUIR). To give an example, the incremental flat tax for VAT holders who do not apply the flat rate and the replacement on tips collected through the employer and intended for waiters and other workers in the tourism sector.

The delegation for tax reform thinks about the flat tax, not only in terms of income outside the Irpef to be taxed with a fixed or proportional tax but also in terms of redefinition of the Irpef. In particular, a reduction in the number of rates is being discussed, with the final objective of a single proportional rate, in a system of deductions and deductions, which should guarantee the progressiveness of the levy. From this perspective, the first step, mentioned by Deputy Minister Leo, could include an initial reduction in Irpef rates from four to three or a further replacement levy on thirteenths, already in the 2024 Budget Law.

Reform in the summer?

The enabling law on the 2023 tax reform, for which the government hopes to have the green light in the summer, provides for the extension of the flat tax to professional associations, companies between professionals, partnerships and family businesses made up of a maximum of three professionals under 35 years of age, with a revenue ceiling set at 85 thousand euros and a tax rate of 15%.

Among the proposals shared between the majority forces and the executive, the main one concerns reduction of IRPEF rates to three. The current IRPEF system is based on four different rates for four income brackets and has been in force since 2022.

The first concrete step of the reform should be the transition to a three-rate system. However, the long-term objective is a "transition of the system towards thesingle tax rate, through the reorganization of deductions from the tax base, income brackets, tax rates, deductions from gross tax and tax credits, taking into account their purposes", according to the basic principle established in the text of the delegation approved by the Government.

The gradual reduction of the rates would not ensure that the income currently taxed with the replacement rates is included under the Irpef. In fact, as reported by the Parliamentary Budget Office, "it is not clear whether the taxable baseof the Irpef will include sources of income that over time have been excluded from its application and subjected to replacement regimes, generating problems of horizontal equity".

There is therefore a tendency towards greater "copay" taxation, in order to avoid the same 100 euros of income being taxed at 5, 10, 26 or 43% depending on how they are obtained.

Comments on the flat tax from Italy and Europe

The flagship of the League, which has become the objective of the legislature, has recently received new rejections from the Bank of Italy, the European Commission and the Parliamentary Budget Office.

In the analysis presented by the Bank of Italy, at a hearing at the Finance Commission of the Chamber on 18 May, it is underlined that the central consequence of this model would be the increase in disparity and inequality. Bankit, therefore, assesses this model as not suitable both for the current Italian system and on the basis of the analysis of data from those countries that already adopt it.

The document drawn up by the European Commission invites the government to make the tax system more efficient, "preserving progressivity[...]and improving its fairness, in particular by rationalizing and reducing tax breaks, including VAT and subsidies harmful to the environment".

Finally, according to the findings of the Parliamentary Budget Office, the transition from the current Irpef brackets to a single rate progressivity scheme "determines redistributive effects thatpenalize subjects with average incomes and favor those with higher incomesunless a high share of revenue is renounced".

The word goes to Parliament

The Council of Ministers of 16 March 2023 approved, with an emergency procedure, the bill authorizing the Government to reform the tax system and now has 24 months to issue one or more legislative decrees to review the tax system.

After the go-ahead from the Council of Ministers, the parliamentary approval process was officially set in motion, starting with the discussion of over 600 amendments in the Chamber commission.

It therefore remains to be seen whether and what changes will be made to the reform idea presented and whether there will also be interventions to reorganize the current replacement regimes.

Given that tax reform appears to be extremely necessary today, however, a question remains: is the flat tax really the best solution?hours that we can imagine in this country?