There is a way to counter deflation and help restart the economy and it has the advantage of not weighing on the state budget and leaving the tax burden unchanged. But it requires courage, political courage. Innocenzo Cipolletta, one of the economists most listened to, former general manager of Confindustria and now president of Aifi (the association of private equity funds) is convinced that Prime Minister Matteo Renzi has this courage and that, precisely at the moment which goes into conflict with the trade unions over article 18, shouldn't worry too much about the "short-sighted protests" of other categories such as those of traders. The proposal, which Cipolletta explains in this interview with FIRSTonline, is very simple: to increase the lowest VAT rates in one fell swoop (with adequate compensation for the weakest incomes) and at the same time reduce personal income tax and Irap of equal amounts. Here's why and how.
FIRST online – Professor Cipolletta, against the recession and against the monster of deflation, Europe has also recently urged Italy to increase VAT, whose revenue is the lowest on the continent, and to reduce the tax wedge by lowering taxes on labour. and on companies, which are instead among the highest: what do you think? Is this a recipe you would recommend to the Government?
ONION – Yes, it is a useful and easily adoptable recipe that Assonime, of which I am vice president, has also proposed to the Renzi government. The recipe, based on the selective increase in VAT rates and the corresponding reduction in Irpef and Irap, is very valid above all for four reasons: 1) it has no impact on the state budget because it has a zero balance; 2) shifts the tax burden from domestic production to imports and through the VAT maneuver generates a sort of fiscal devaluation just like Germany did in 2003; 3) favors Italian competitiveness; 4) counteracts deflation because the moderate rise in prices brings our inflation target closer to that imagined by the ECB, resulting in greater growth in the value of GDP.
FIRST online – How should the VAT increase be implemented? Would it affect all three rates or only some and which ones? By how much and in what time?
ONION – The VAT increase should not concern the maximum rate of 22% but affect, selectively, the 4% rate which should rise to the upper step of 10% and the 10% rate which could rise to 22%. Naturally such an operation, which requires adequate compensation in terms of personal income tax for the lowest incomes, is effective if it is immediate: that is, it must take place immediately, in one fell swoop and by decree.
FIRST online – Who gains and who loses from the exchange plus VAT and minus Irpef and Irap?
ONION – It depends on how it is done but, in principle, whoever gains is national production through the so-called tax devaluation and, if the reductions in Irpef and Irap are well thought out, low incomes and the competitiveness of companies on the domestic market also gain and international.
FIRST online – What revenue can the increase in the lower VAT rates generate?
ONION – Since we are not imagining generalized but selective increases on goods at the two lowest VAT rates, we need to see how exactly the maneuver takes place, but the higher revenue is substantial if we consider that the increase of just one rate point, if it were extended to all goods, it would produce between 3 and 4 billion euros more for the tax authorities. It suffices to do the calculations to realize that the higher tax amount that would become available is significant, even if it does not affect the whole audience of the two lowest VAT rates. In other words, the Government can realistically expect to obtain no less than 9-10 billion euros from such an operation.
FIRST online – Can the greater revenue obtained from the selective increase in the lower VAT rates all go towards the reduction of Irpef and Irap?
ONION – Certainly yes, both to compensate for lower incomes and to boost the competitiveness of businesses. The resources would be obtained to confirm and help finance the tax reduction of 80 euros per month for the lowest incomes and to help extend it to the incompetent, retired and lighter VAT numbers without neglecting a new reduction in Irap. Naturally, the more intense the VAT increase, the greater the resources available to allocate to the reduction of Irpef and Irap, keeping the overall tax burden and the budget balance unchanged.
FIRST online – The VAT increase could have the effect, beneficial today unlike in the past, of raising prices bringing inflation back close to the ECB's 2% target, but it seems to have two contraindications: it will curb the already very frail consumption and social inequalities. What do you think?
ONION – These are objections that can be easily disassembled through a skilful combination of the VAT and Irpef maneuvers, especially with an eye to lower incomes. On a social level, I don't see any particular difficulties if the operation is well modulated and well explained. As for the effects on consumption, I imagine them limited and above all I think that a clearly anti-deflationary operation like the one devised can only be beneficial from this point of view as well.
FIRST online – Basically, can the VAT-Irpef exchange become the magic mixture that finally gets the Italian economy back in motion?
ONION - Let's not be too delusional. Certainly, the proposed maneuver can attack Italian deflation and lay the foundations for a recovery, but without a far-reaching European economic policy, we will not be able to reverse the trend on our own and definitively emerge from the quagmire.
FIRST online – Professor Cipolletta, beyond the rationality of the proposed maneuver, the traders have already put their hands forward against a VAT hike: do you think that Renzi will feel like addressing their protests too?
ONION – Frankly, the traders' protest seems very short-sighted to me, because, if prices rise also as a result of the VAT increase, deflation is dealt a blow and, also through the concomitant operations on Irpef and Irap, it contributes to restoring drive the demand by creating the conditions for the final balance to become positive for them too.
FIRST online – But, in your opinion, will Renzi have the courage to take such a demanding road?
ONION – Many signs would suggest yes. A centre-left prime minister who for the first time had the courage to debunk the taboo of article 18 and to revise the Workers' Statute has already demonstrated that he does not look anyone in the face and, even more so now, is in a position not to letting oneself be immobilized by the stale protests of the traders. Reducing taxes on labor and businesses without increasing the overall tax burden is a great challenge and Renzi, if he wants, has all the credentials to win it.
