Hope for Italy? Well, hope never dies...
David has kindly linked into a new post by Alvin Rabushka on the possible adoption of a flat tax in Italy after the next elections. Rabushka travels the world promoting flatter taxes, and I can understand why he’s happy with the way the Italian election debate is developing. Basically, the proposal for a flat tax system is the only one around. It is endorsed by parties on the right, as he claims in his piece. Others oppose it but without any strong, alternative proposal.
That the Italian tax system is so convoluted and complex that it needs profound and drastic reform is a fact that nobody would challenge. But if the right is waving the flag of a flat tax, which is appealing precisely because of the over-complications of the current system, the left thinks of using the tax system to award prizes to groups that favour it, and the populist Five Star Movement flirts with the idea of a minimum basic income.
Italian politics is, at the moment, tremendously personalised, so you can always find in the papers interviews with party leaders, but you’d be hard pressed to read any detailed or serious explanation of their proposals by party representatives in charge of specific policy areas. An interesting consequence is that such “plans” as those the leaders have announced are not “plans” at all: they are rather statements of principle, mere intentions, devoid of any implementation strategy.
So, it is not just Rabushka’s post that sounds vague when he writes about the possible introduction of a flat tax in Italy. Political parties talk very vaguely, too. Certainly there is no Northern League proper plan to cut income tax rates to a flat 15%, if by “plan” you mean something well structured, taking into account distributive effects and the effects on public finances. Another thing is to assume that, by magic, lowering tax rates will provide all the resources that are needed to keep the government afloat. A daunting task, since, if I understand it right, the Northern League also proposes to raise public spending in a variety of ways, the most conspicuous of which would be lowering (yes: lowering) the retirement age.
So, is a flat tax for Italy a pipedream? At first sight, it makes sense to dismiss it as such. After all, flat taxes have had a go in Eastern Europe, where tax systems could be rebuilt from scratch, but were never an option in a mature Western democracy. For one thing, the complexity of the tax system reflects the workings of a bargaining democracy. For another, high public spending discourages such path-breaking reforms.
At my Institute, we prepared a more structured flat tax reforms months ago. This was widely discussed in the press, including by former prime ministers and the current (left of the center) finance minister, who declared he found the idea “intriguing”. A book with the full study was published and more recently an e-book collecting the different commentaries which appeared on Il Sole 24 Ore, Italy’s leading financial daily.
I’ve briefly described our plan and the debate in Standpoint in September 2017.
Let me just quote one paragraph from that piece:
Our proposal would decrease both the overall tax burden and the 50 per cent of GDP spent by the government. Once fully operative the reform would cut both figures by 4 per cent [by which I meant percentage points]. It will require a spending review, aimed at achieving modest cuts initially of 0.6 per cent of GDP, rising eventually to 1.6 per cent. The full implementation of our proposed reform should be strictly conditional on this review.
This is an element of our proposal that made it credible. Now, in an interesting twist, our proposal being credible has helped parties in advancing other proposals, which instead entail a rather reckless approach to public finance. Not something that a country whose debt/GDP ratio is 132% can afford.
Professor Nicola Rossi, a distinguished economist who is the veritable originator of our proposal, and I wrote a letter to the FT recently making a similar point. We also highlighted how IBL’s proposal is hardly *only* a flat tax, but is in actual fact a complete restructuring of the Italian tax system that makes a flat tax sustainable.
Now, even our “more sensible” proposal is subject to criticisms. People often say that the Italian constitution mandates progressivity: which is true, but such a mandate applies to the whole tax system as such, and not to the income tax in isolation.
A more serious criticism is that cutting tax expenditures is never easy, as we live in a bargaining democracy. Interestingly enough, that is an element one of the center-right parties (Forza Italia, Mr Berlusconi’s one) has picked up, saying upfront that the reform will be financed by cutting tax subsidies to special interests. To be fair, a reform of tax expenditures has long been discussed in Italy: so far, to no avail.
As Professor Rossi and I wrote, “A flat-tax proposal may sound bold for a country such as Italy but in the face of its complexity incremental reforms appear less likely to succeed than a radical simplification.”
I stand by that statement. I was also rather pleased by a recent Mr. Berlusconi interview, where he said that the most important thing now is to establish the principle of the flat income tax: the tax rate could be lowered later, when compatible with the situation of government finance. Alas, Mr. Berlusconi’s record of keeping his electoral promises is hardly encouraging.
So, I can’t really go with Dr. Rabushka’s enthusiasm. This electoral campaign is in many ways awful, not because of the flat tax, but by virtue of the simplistic and shallow arguments being put forward by all political parties. The left is equally bad if not worse: consider that the President of the Senate is running with a new party, whose platform is basically a cut-and-paste of British Labour party leader Jeremy Corbyn‘s. On top of that, the electoral law is actually conceived to make it almost impossible for any single coalition to win elections. Now, the “establishment” left is sinking fast, to the benefit of the populist left and the right, so it may well happen that, despite the electoral law’s design, we will have a clear winner at the polls. But it’s hard to forecast.
The main hope for fiscal reform in Italy is that the complexity of the tax system calls for a bold initiative, be it a flat tax or something else, because incremental reforms can hardly achieve a substantial impact. The main problem for fiscal reform in Italy is that the situation of public finance would require public spending cuts to go for such a reform, and politicians naturally try to avoid cutting as much as they can. Our hopes are indeed treading a narrow path.