Tax breaks, tax credits, exemptions & Co. The Italian labyrinth of tax expenditures (and why it is not simple to sort things out)

Foto Agevolazioni, detrazioni, esenzioni & Co. Il labirinto italiano delle spese fiscali (e perchè non è agevole mettere ordine)

Exemptions, tax breaks, tax credits, reduced tax rates, subsidies beneficial (or harmful) to the environment: are tax expenditures in Italy too high? For years the Council of the European Union has been asking our country to promptly reduce "the use and generosity of exemptions and of preferential tax treatments. The national reform programme (PNR) already envisages, for 2017-2018, a review of the entire sector, and even the DEF 2018 (economic and financial document) has acknowledged the need to cut tax expenditures.

Although such decision has been taken, the reorganisation will not be easy: the Yearly report on tax expenditures, which is supposed to provide the due basic cognisance for all rationalisation processes, identified 636 different measures (466 concerning national taxation and 170 concerning local taxation). A real labyrinth of tax breaks and allowances, which has a remarkable financial impact - the missed revenue for the State is estimated to total about 75.2 billion Euros in 2018 - but there seldom is certainty when it comes to figures and crucial information.

For example, we are aware of the actual number of recipients only for 132 tax measures (out of 466). Over half ofthese allowances benefit a very low number of taxpayers: less than 30,000 (who enjoy the greatest tax rebates, in terms of average value per capita). And there are three different tax breaks affecting a total of more than ten million people.


What are fiscal expenditures?

  • Any form of exemption, exclusion or reduction of the taxable amount or of the tax itself or a preferential regime under the regulations in force.

    Fiscal expenditures are listed in the Annual Report which is attached to the revenue forecast in the draft State Budget.

    The following are fiscal expenditures:

    · Deductions

    . Discounts

    · Tax credits

    · Rate reductions

    · Exemptions

    · Exclusions from income

    · Special schemes

    · Excise reductions

    · Substitute taxes

    · Flat-rate schemes

What are they for?

  • They allow the government, without resorting to explicit spending programs, to pursue a variety of public policies: support - for example - for certain types of income earners, families, healthcare, economically or socially disadvantaged persons, artistic and cultural heritage, research, education, the environment or technological innovation.

Who benefits?

  • Different categories or groups of taxpayers, depending on the public policies being pursued: small firms, companies, cooperatives, employees and the self-employed, natural persons, the third sector...

How do they work?

  • It depends on their nature:

    · Deductions reduce the taxable amount

    · Discounts, rate reductions and excise reductions reduce the tax payable

    · Tax credits can be used as compensation

    · Exemptions, exclusions from income, and special and lump-sum schemes override ordinary taxation

What is the difference between a fiscal expenditure and a spending program?

  • Public policies can be pursued - and indeed are - both through fiscal expenditure and through explicit spending programs for which specified or determinable resources are allocated according to the objectives identified. Compared with fiscal expenditures that do not have a cost cap and whose real fiscal impact is known only after the fact, the use of a spending program makes it harder to avoid budget constraints and favours fiscal transparency. In fact, spending programs operate with pre-determined appropriations until they are exhausted.

Why is it so difficult to define fiscal expenditure in Italy?

  • In spite of in-depth analyses carried out even by international organisations (OECD, IMF, EU), in Italy there are still many differences in the methodological approaches used to define a measure such as fiscal expenditure. As a result, the different studies done over time - the first and the second Reports on fiscal expenditures, the annual lists of measures contained in the supplementary notes on revenue in the draft State Budget, the 2011 report of the Working Group on Tax Erosion - always present different data regarding the number of measures, their full particulars and the objectives being pursued.

    It is difficult in this context to define with certainty the overall size of the measures: adding up the figures indicated in the 2017 Report, for the year 2018 one arrives at a total amount of Euro 75.2 billion, i.e. Euro 1.3 billion less than was indicated in the first annual report: Euro 76, 5 billion.


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