Constitutional Constraints and the Final Goal: Implementing a Flat Tax for Everyone

Final goal: flat tax for everyone. The constitutional constraints

After the obvious go-ahead from Parliament to the draft enabling law on tax reform, what should be the new Meloni-branded taxman in the projects is preparing to get its hands on the revision of the Irpef. The ultimate goal is the single rate. However, the criticisms of the idea of ​​a flat tax for everyone have not disappeared, given that article 53 of the Constitution is clear when it speaks of the progressiveness of the tax that citizens, including foreigners, are required to pay. In fact, this must be proportional to the increase in their economic possibilities. In other words, according to the constitutional principle, the tax must grow with the increase in income, while the flat tax is the exact opposite: the “flat” and single tax in fact provides that all taxpayers pay the same percentage of their income in taxes, regardless of how much they charge. So then the government speaks of a “universal flat tax in the sense of progressivity”. Progressivity would be ensured, according to the government, through a series of deductions and deductions. The “flat tax for all” objective is still at the end of the legislature. Therefore, there is time to see how the government will concretely succeed in its objective while respecting article 53. Meanwhile, the road map has been drawn up. So let’s see what the main steps are and how they could affect the salaries of Italians.

The reduction of the personal income tax brackets

The first step of Melon’s march towards the new tax system starts with the attempt to implement the single tax rate model, followed by the identification of the general principles that will have to illuminate the road through the transition from the current personal income tax brackets up to the arrival of the single tax. As for the reduction of personal income tax, it was the Draghi government who gave the go ahead with the 2022 Budget law, which brought the brackets down from 5 to 4, then also redefining the value of the rates: downwards for the second and the third echelon. Therefore, now the Meloni government, continuing in the footsteps traced by the former prime minister, intends to reduce the brackets from 4 to 3, possibly by remodulating the related tax rates.

Le tax expenditure

Article 5 of the enabling bill on the tax reform approved by the parliament explains how the transition towards the single tax also provides for a reorganization of the tax expenditures, i.e. the many deductions, deductions and tax credits which cause for many the tax burden is lightened. But, as we know, tidying up generally rhymes with a crackdown and, therefore, one can imagine a reduction in the items that can be used to reduce gross taxation. To save the concept of “single progressive tax”, however, for many categories the deductions will have to increase. The problem, as always, is that between electoral promises and their realization there are public finance constraints. In short, it is not said that there will be the funds to achieve this goal. Suffice it to say that the Draghi reform, with the elimination of an income tax bracket, alone cost 8 billion euros. Furthermore, by now putting his hand to deductions and deductions, as the government wants to do, there is a risk that what is given by a reduction in the rates will be negatively offset by the cancellation of some deductions: the final bill could therefore go even if not even make the taxpayer’s situation worse. For this reason, the approved draft law established a general principle of safeguarding certain categories of citizens and certain sectors: the objective, in fact, should be to treat families with children and the disabled, the home, the health, education, supplementary pensions, energy efficiency, cultural assets, etc.

The principle of horizontal equity

In public economy there is the principle according to which subjects who have the same ability to pay must be taxed equally. This principle, which is called “horizontal equity”, underlies the government’s decision to include it in the indications relating to the transition phase from personal income tax to the flat tax with the aim of overcoming the inequalities between the tax burden on income from employment and that coming from other activities subject to personal income tax, as well as the disparity given by who can access subsidized replacement schemes. How does the government intend to move? First of all, the law indicates the application of the same tax exemption area for all Irpef income, starting from the equation between employment income and pension income. Furthermore, work is being done on the possibility of extending to employees the possibility of deducting, as the self-employed do, expenses related to their work activity, i.e. those that have contributed to producing income.

Irpef tax brackets, the current state…

Once the guidelines of the tax reform have been clarified, if the reduction to three of the personal income tax brackets goes through, what effects will there be on payroll as soon as the reform is confirmed?
Now, after the Draghi reform, Italian taxpayers are divided into four brackets:
1) up to 15,000 euros of income (with a 23% personal income tax levy);
2) from 15,000 to 28,000 euros (with a 25% withdrawal);
3) from 28,000 to 50,000 (with a 35% withdrawal);
4) above 50,000 euros (with a 43% withdrawal).
Therefore, in order to reduce the rates to three brackets, these four brackets will have to be modified and merged in some cases. So let’s see the simulations that the labor consultants had prepared for Corriere in recent months and which help us understand who will earn the most from this reform.

… and how they could change: first hypothesis

There are various hypotheses for the reform of the brackets, among the most accredited hypotheses there is the one developed by the State Accounting Department, which provides for the unification of the second and third brackets in a single bracket (see table) which includes the income between 15,000 and 50,000 euros, to be subjected to a levy of 27% (although there was also talk of 28%). In this hypothesis, the first and last band would be untouched. It is clear that the range currently between 28,000 and 50,000 euros would benefit from it because it would go from today’s levy of 35% to one of 27% or 28%, with a saving of no less than 7-8 percentage points. As can be seen in this table, with an income tax rate of 27% for the new bracket from 15,000 to 50,000 euros, incomes up to 28,000 euros would be penalised.

Some examples

But let’s see some examples:
– Income of 20 thousand euros: today he pays 4,700 euros in personal income tax, he would go to pay 4,800 and would have a tax burden of around 100 euros (+2.13%);
– Income of 35 thousand euros: today he pays 9,150 euros, he would go to pay 8,850 euros and would have a reduction of 300 euros (-3.28%);
– Income of 50 thousand euros: today he pays 14,400 euros, he would go to pay 12,900 and would have a tax relief of around 1,500 euros (-10.42%);
– For an income of 60,000 euros: today he pays 18,700 euros, he would pay 17,200 euros in Irpef and would have a tax relief of around 1,500 euros (-8.02%).

Second hypothesis

Another simulation made by the Labor Consultants still provides for three income thresholds and three tax rates but redesigns both the first and second bracket (see table).
The first bracket of income would rise to 28,000 euros, without prejudice to the 23% rate, while the second would always apply up to 50,000 euros as in the first hypothesis but the rate would be 33%. Lastly, no change for the third bracket which would remain at 43% for incomes over 50,000 euros. The effects of payroll withdrawals would be as follows:
– Income of 20 thousand euros: today he pays 4,700 euros in Irpef, he would go to pay 4,600 and would have a tax relief of around 100 euros (-2.13%);
– Income of 35 thousand euros: today he pays 9,150 euros, he would pay 8,750 and would have a tax relief of around 400 euros (-4.05%);
– Income of 50 thousand euros: today he pays 14,400 euros, he would go to pay 13,700 and would have a tax relief of around 700 euros (-4.86%);
– Income of 60 thousand euros: today he pays 18,700 euros, he would go to pay 18,000 and would have a tax relief of around 700 euros (-3.74%)

In the case of intervention on the No tax Area

According to this analysis, therefore, it is not – if these are the numbers – a reform that favors the lowest incomes. However, a lot could change with a modification of the No Tax Area for employees and pensioners to 8,500 euros. The current four-rate Irpef structure in force for the 2023 tax year provides for a different No Tax Area (NTA) for the three main types of income. In particular, for employee income, the NTA is equal to 8,174 euros, for pension income it is equal to 8,500 euros, while for self-employment income it is equal to 5,500 euros. Employment income also benefits from the supplementary treatment of 1,200 euros per year up to 15,000 euros of taxable income (this is the former Renzi Bonus of 80 euros, which later became structural at 100 euros per month). As the taxable income rises and approaches 50,000 euros, the differences between the deductions tend to decrease and finally zero for all three types of income at a taxable amount of 50,000 euros. This means that the net personal income tax is the same for all three types of income in correspondence with this taxable threshold. The differences between the deductions are instead very significant in the lower part of the income curve.

2023-08-15 05:49:22
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