Su FIRSTonline on September 20th Innocenzo Cipolletta has proposed to seize the moment of deflation in which the Italian economy finds itself to adopt a more than appropriate balanced budget maneuver consisting of an increase in some VAT rates to finance a corresponding reduction in income tax and Irap.
As we read in the good textbooks of the past, such an operation is equivalent (Cipolletta appropriately reminds us) to the effects of the devaluation of the lira before 1994 when the adoption of the euro and irrevocably fixed exchange rates no longer allowed this measure. If then the devaluation of the lira favored exports but was also passed on to internal prices, today the increase in VAT has no effect on exports as it is reimbursable and the risk that it will pass on to internal prices appears very modest.
While the reduction of personal income tax stimulates consumption and that of Irap favors exports by reducing the tax wedge on labour. In any case, monetary GDP would increase both due to the modest effect on prices and to the stimulus to growth, but the stock of public debt would not grow as the proposed maneuver is subject to a balanced budget constraint. Instead, the debt/GDP ratio would decrease.
The graph and the accompanying table offer other reasons for adopting a balanced budget policy. The graph shows that for years the composition of tax revenues has converged towards the substantial equivalence of the weight of direct taxes, indirect taxes and social contributions on total revenue. Each component weighs about 15 percent of GDP. In summary, consumption (and traders) has always been privileged in terms of taxation over household income and the labor cost of manufacturing companies.
For its part, the attached table shows the weight of the tax erosion of VAT due to the reduced rates: over 40 billion euros. There is therefore ample room for an important and immediate balanced budget policy that will boost supply and stimulate unutilized production capacity.
The current phase of the economy offers a propitious moment to make a courageous recomposition of total tax revenues: increase taxation on consumption to favor the reduction of taxes on household income and the reduction of the labor cost of exporting manufacturing companies. Traders with little exposure to international competition will complain and others will say that the "problem is upstream and in any case another one". But I believe that Renzi will answer "how scary" this time too!
