Raise the VAT for bring down the tax wedge. A fair exchange? Perhaps. The technicians of Palazzo Chigi and the Treasury are thinking about it, grappling with the Economic and Financial Document (Def) and with the National Reform Program (Pnr) to be presented next month. Of course, the novelty is still only a hypothesis and could eventually see the light only in the 2018 Budget law. But if it were to go through, it would be a change of primary importance in the context of the entire Italian economic policy.
Basically, it would be a question of applying the principle of communicating vessels to general taxation: the idea - writes Il Messaggero today - is to retouch the intermediate rate of VAT from 10 to 13 percent and use at least part of the additional revenue (about 7 billion a year) to reduce the difference between gross and net payroll. The reduction of the wedge would focus above all – if not exclusively – on the component of social security contributions paid by companies (to induce them to hire) or by workers (to stimulate their consumption). Or both, perhaps with an asymmetrical distribution: two-thirds of the relief benefits employers and one-third benefits employees.
Has been Prime Minister Paolo Gentiloni, last Sunday, to announce the government's intention to reduce and the tax wedge: a structural measure with significant expansion potential, but unfortunately also very costly. To limit the impact on public finances, there has already been talk of applying it exclusively to the stable hiring of young people, but if in the end the VAT increase becomes a reality, it would open up room for maneuver in the accounts which could be used to expand as much as possible the number of employees (or companies) to be included in the cut in labor costs.
But there is also a flip side, which is far from secondary. The VAT increase would go exactly in the opposite direction to the tax wedge cut, because it would have a depressant effect on consumption. And the intermediate (or reduced) rate applies to vital expenses such as those for energy, transport, medicines, meat, fish, hotels, bars, restaurants, cinemas and theatres. Beyond the economic assessments of Treasury technicians, suddenly raising the prices of all these products and services could be a choice electorally difficult, especially in view of the campaign for policies that will open in the coming months.
On closer inspection, however, an autonomous government initiative would not be needed: it would be enough to trigger it the existing safeguard clauses. Those envisaged for this year and sterilized with the latest Budget law envisaged not only the increase in the reduced rate of VAT from 10 to 13 per cent, but also the increase in the ordinary rate from 22 to 24 per cent in 2017 and again at 25 percent in 2018. Increases that the government has not averted forever, but only postponed for a year. And in 2018 things could go differently, with the increase blocked only for the highest rate.
Certainly, the VAT-tax wedge exchange it would be very welcome to the EU, which in its recommendations to Italy has been reiterating for years the need to reduce the tax levy on individuals by increasing that on consumption and property.
