The Flat Tax Is Back in Italy Election Campaign

In Italy, the hot new economic topic is an old classic: the flat tax.

With a little more than a month to go before March 4 parliamentary elections, opposition to the euro--a theme that has dominated political discourse--is virtually absent, as even fiery populists back away from promises to yank Italy from the single currency.

Instead, a resurgent Silvio Berlusconi, the billionaire media mogul and three-time premier, has sparked heated debate by dusting off a long-standing promise to institute a flat tax, an idea that has particular appeal in a country wracked by tax evasion and a tortuous tax code.

Polls suggest no party or coalition will gain an outright majority, meaning it would likely be tough to get such legislation passed. But Mr. Berlusconi's Forza Italia party and its center-right coalition partners, who together are polling at 36%, have made the idea a cornerstone of their economic platform released late last week.

The flat tax, a system in which everyone pays the same rate, has been pushed by conservatives around the world for years, but it hasn't been widely implemented and there is strong disagreement about whether it works.

Mr. Berlusconi and his allies in the League, a populist party that enjoys strong backing from small business owners in the wealthy north, echo arguments that if the tax system were simplified people and companies would more readily pay up while keeping more cash to buy goods or make investments. But opponents warn a flat tax is unrealistic, would benefit the wealthy over the poor and lead to big budget shortfalls.

Neither the upstart 5 Star Movement, polling at about 28%, nor the ruling Democratic Party, which is trailing well behind, support a flat tax, though they have both pledged to cut taxes.

According to the World Bank, companies spend 238 hours meeting their tax obligations, more than double the U.K. and 63 hours more than in the U.S. Italy's companies pay an average of 65% in taxes, while its top income tax rate on individuals is 43%.

"The flat tax will reboot the economy and create new jobs," Mr. Berlusconi said in a recent television interview.

Mr. Berlusconi and the League differ on their desired tax rate, with Mr. Berlusconi arguing the individual and corporate rates should for now be set at Italy's current minimum tax rate of 23%, and the League pushing for about 15% so that lower-income Italians could also benefit.

A flat rate of 25% would reduce tax revenues by EUR27 billion a year, according to calculations of free-market think tank Istituto Bruno Leoni, which advocates a flat tax at that level and says budget cuts should make up for it.

The center-right coalition argues a decline in tax evasion would cover much of the shortfall. Even when the Italian state catches tax dodgers, it manages to collect only half the revenue owed.

Opponents point out that Mr. Berlusconi was never able to enact such a plan in his earlier years in office. They contend a flat tax would blow a hole in public finances, something a country with the world's third-largest public debt can ill afford.

"When you cut a tax you need to cover [the shortfall], so you need to show it," Economy Minister Pier Carlo Padoan said Tuesday. The flat tax "is part of those proposals I call blue fairies or magic wands, because they are miraculous."

Analysis by economists and international organizations over the last decade suggest flat tax systems had mixed results. The European Central Bank found that around 10 years after their introduction in several eastern European countries, including Bulgaria and Estonia, economic growth may have been independent.

Francesco Daveri, a professor of macroeconomics at Milan's Bocconi University who opposes a flat tax, cautioned that it would be hard to draw conclusion based on other countries' experiences. "Comparisons ... are often misleading because the GDP or tax revenue growth observed there has been heavily influence by other factors and not solely by the flat tax," he said.

The center-right electoral program makes no mention of quitting the euro or introducing a parallel currency, an idea touted in the past by both Mr. Berlusconi and the League.

The 5 Star Movement, which presented a 20-point plan over the weekend, hasn't entirely dropped its call for a referendum on membership of the eurozone. But it has sharply toned down its stance.

"I believe it is no longer the right moment for Italy to leave the euro, " said 5 Star leader Luigi Di Maio this month.

Just more than half of Italians support the euro. The failure of populist parties elsewhere in Europe to leverage an anti-euro platform to come to power last year may have blunted its attractions as a campaign pledge in Italy.

Other campaign themes include 5 Star's promises of a universal basic income and to spend EUR50 billion on technologies such as renewable energy and fiber-optic communications. All the parties are promising more expansive public spending.

But the campaign is notable for the lack of concrete proposals to tackle chronic problems such as the country's two-trillion-euro debt, its sclerotic bureaucracy or deeply inefficient justice system.

Write to Giovanni Legorano at giovanni.legorano@wsj.com

(END) Dow Jones Newswires

January 24, 2018 08:06 ET (13:06 GMT)